CSC Holdings: Earnings boosted by property development (OSKDMG)

(NEUTRAL, S$0.10, TP S$0.11)

CSC’s 2QFY12 earnings were above expectations due to a one-off profit contribution (before taxes) of ~$3.7m arising from the development of an industrial property. Stripping away the one-off earnings, pre-tax core construction earnings would be ~S$1.7m, down 67.3% YoY despite a 21.6% YoY jump in core construction revenue. This dip is due to lower margins secured on contracts amid keen competition. Nonetheless, 2QFY12 profit is still a significant improvement over 1QFY12 PBT of S$0.5m, attributable to a 16.8% QoQ increase in core construction revenue. While order book is strong, standing at S$220m currently (+10% from last quarter), margins may only pick up in 2HFY12 due to intense competition. We have raised our FY12 earnings forecast by 34.5% to S$7.1m, to reflect the recognition of the industrial property development earnings. Maintain NEUTRAL with a lower TP of S$0.11 (previously S$0.12), based on 0.8x P/B (previously 0.85x) - the level CSC was trading at post the 2005-2007 construction up-cycle.

2QFY12 results boosted by property development. 2QFY12 earnings rose 30.9% YoY on the back of higher revenue (+42.3% YoY). However, we note that this was mainly due to its industrial property development. Core construction gross margins are still below the historical average of mid teens, coming in at 9% this quarter, due to keen competition. Stripping away the one-off earnings booster, CSC’s pre-tax core earnings would come in at S$1.7m, down 67.3% YoY, but up significantly from last quarter’s pre tax earnings of S$0.5m.

Lifting earnings forecasts but risks remain. We raised our FY12 earnings forecast by 34.5% to S$7.1m, on the back of a 1ppt increase in gross margins from 8% to 9% (to factor in the property development contribution) and tweaked our expenses. While we view the 21.6% YoY and 16.8% QoQ growth in this quarter’s construction revenue as a positive, indicating that a strong pipeline of projects are out for grabs, downside risks to our earnings estimate remains. These include unforeseen project delays, as well as additional and prolonged pricing pressure in the sector. Thus, we maintain our NEUTRAL recommendation on the stock for now.