Small-mid-cap stocks can suffer from high volatility from limited trading liquidity. CSE tumbled 12% within a day as French-based institutional investor, Amundi, pared down its stake. We believe the market could have oversold CSE.
We upgrade CSE to Outperform
(from Underperform) on the back of its recent underperformance. We maintain our earnings estimates and TP, still at 6x CY13 P/E, its average during the last crisis.
What Happened
CSE has underperformed the FSSTI by 30% over the past three months. It is trading at 1.4x CY12 P/BV, its trough during the GFC. Its de-rating began with its 2Q11 loss shocker from execution problems at two Middle East projects. More recently, its underperformance was precipitated by French-based institutional investor Amundi’s decision to pare down its stake.
What We Think
We believe the market could have oversold CSE. In view of lower operating and financial risks today, we believe trough valuations are unwarranted. Unlike 2008-09, companies do not have to contend with sharp forex and oil-price gyrations. Moreover, operations are healthier as its new businesses have been integrated. CSE’s order book offers a bigger buffer this time around and its financials are stronger. Put together, we project a 73% yoy rebound in FY12 EPS.
What You Should Do
Now is the time for long funds to pick up the stock. Our price range derived from various valuation methodologies indicates a favourable risk-reward trade-off. A general recovery in the business cycle, stronger-than-expected results and a stronger order intake could lead to a re-rating, in our view.
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