Hold on tight amid supply chain disruptions
Results Review
1H22 revenue stood at $262.2m, 11.8% higher y-o-y. This represents 55% of our full year forecasts. The higher revenues can be ascribed to a 47.9% growth in infrastructure revenues in Australia and the Americas region. Revenue from the Energy segment declined by 7.4% y-o-y due to lower contributions from large projects. The mining and minerals segment grew 18.4% y-o-y on the back of stable commodity prices and higher mining activities.
1H22 net profit declined by 55% y-o-y to S$4.5m (vs S$10.1m in 1H21), below expectations due to supply chain disruptions, changes in the sales mix and higher operating expenses. 1H22 net profit only amounted to 21% of our full year forecasts. Gross margins came in 2.1 percentage points lower at 27.8% owing to (i) a change in sales mix with higher revenues from the lower-margin energy sector, and (ii) lower margins of new infrastructure projects. CSE also reported lower net margins of 1.7% (vs 4.3% in 1H21) which was negatively impacted mainly by higher operating expenses from the newly acquired subsidiaries (+S$2.7m), increased staffing costs (+S$1.8m), selling & distribution expenses (+S$1.8m), and upkeep of building and equipment cost (+S$1.1m). The higher personnel costs can be attributed to unabsorbed labour costs as CSE expanded its technical workforce to meet the demands of new orders. Overall operating expenses increased by 13.7% y-o-y, which was higher than the 11.8% y-o-y increase in revenue, resulting in lower margins. We should expect an improvement in margins when supply chain disruption eases.
Order intake in 1H22 soared 100.3% to S$421.7m (vs S$210.6m in 1H21). Robust growth was recorded across all three segments, led by the energy sector which recorded 124.0% y-o-y growth to S$238.3m (vs106.4m in 1H21). As at 2Q22, CSE’s orderbook stood at S$388.9m (vs S$344.0m in 1Q22).
Interim dividend of 1.25 Scts/share declared in 1H22 (vs 1.25 Scts/share in 1H21)
Outlook
Outlook more promising except for the absence of large greenfield projects in the traditional energy sector. Generally, the energy sector is still highly disciplined with their capital expenditure, resulting in fewer large greenfield projects in 1H22. This is likely to continue into the second half which could dampen revenue contributions from the energy sector. However, recovery in the flow business and new business opportunities in renewables should help to cushion the lower contributions from large greenfield projects. The infrastructure and mining & minerals sector will be bolstered by steady flow of projects as it leverages on trends such as digitalization and advancements in physical and cyber security.
Confident of a better 2H22 despite supply chain disruptions. Supply chain issues have resulted in project delays and higher costs of executing projects which has led to lower gross margins. Nonetheless, the robust orders point to a healthy pipeline and CSE is sanguine about the second half of the year. We also think that the second half could be brighter as the strong order wins could mitigate the unfavourable impact from the supply chain disruptions. The execution of recent contract wins is also likely to be backloaded in 2H22 and FY23, which could boost business performance going forward.
Nonetheless, supply chain disruptions are still likely to exert pressure on margins. There is still a lot of uncertainty surrounding the supply chain disruptions, hence we have reduced our FY22/FY23F gross margin estimates to 27.2% and 27.7% (vs 28.7% and 28.6% previously)
Growth of the communications business through two new acquisitions. CSE has acquired a 100% share of DTS solutions and General Communications (Gencom). DTS was acquired for S$4.7m and is involved in providing event hire and technical services as well as radio communication sales in the United Kingdom. Gencom, located in Australia, was acquired for a consideration of S$8.1m and primarily provides radio communication sales, installation, and services. The acquisition of DTS will enable CSE to grow its communication systems business in the United Kingdom while the acquisition of Gencom will enable CSE to expand its telecommunications business in Australia. We think that contributions from these acquisitions is not likely to be material, however it is aligned to CSE’s acquisition strategy to build up its adjacent and complementary capabilities.
Downgrade to HOLD with a lower TP of S$0.45 (previously S$0.59). We raised FY22/FY23F revenues by 15% and 10% on account of the strong order wins. We reduced FY22F/FY23F earnings by 37% to 19%, mainly to account for lower margins due to the still challenging environment on the back of the supply chain disruptions. Our new TP of S$0.45 (previously S$0.59) is pegged to 16.8x (+1 SD of its four-year average PE) on FY22F earnings, (vs. 13.8x previously), on the back of a generally improving outlook.
