Attractive industry dynamics. CSE Global (CSE) is a medium-sized player in the global system integration industry, providing mainly industrial control, automation and telecommunication solutions to the oil & gas sector. Its products are highly specialised (e.g. telecoms network for offshore platforms) and/or used in high integrity environment (e.g. subsea wellheads). The combination of high entry barriers and robust demand for such specialised services allows CSE to earn 9-12% net margins while competing against global players such as ABB and Siemens.
Well-managed growth strategy. CSE's revenue and net profit have grown at compounded growth rates of 15% and 17% respectively for the past eight years, through consistent project executions and sensible acquisitions. On project executions, the only blip in its track record was the S$22m cost overrun in its Middle East projects in 2Q11. However, management has since taken actions to prevent a repeat of the incident. As for its M&A strategy, we believe that CSE is a prudent and experienced buyer that guards against overpaying by setting performance targets as part of its purchase consideration.
Strong order-book. As at end-Sep 11, CSE has a record order-book of S$487m (against S$448m of revenue in FY10), of which about 19% are for its healthcare systems. The remaining 81% are for its automation/telecoms/infrastructure solutions. We believe that the group's geographical diversity help it replenish its order-book effectively. As an example, we note that while infrastructure investments from Europe is currently slowing down, CSE is seeing increased order flow from US E&P activities following the resumption of drilling activities in the Gulf of Mexico.
Initiate with BUY. We assign a valuation peg of 9x (25% discount to STI's 12x) for CSE, and obtain a fair value estimate of S$1.06 on FY12s EPS. At current price, the stock is trading at one standard deviation below its PER and PBR averages. We think that such steep discounts are unwarranted as the group has (i) a healthy order-book that will provide earnings stability over the near term horizon, (ii) strong free cash-flow that will mitigate any risks associated with its debt levels, and (iii) an experienced management team. Initiate with BUY.
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