In a sign of how far the oil and gas sector has declined, systems integrator CSE Global’ share price crashed to six years low after the company announced a set of poor financial results for the quarter ended 30 September 2016. Profit after tax decreased by a whopping 52.7% year-on-year while revenue dropped 21.6% year-on-year.
I have previously covered on CSE global before in my blog. CSE Global operates in two business segments: process controls (74.0%) and communications and security (26.0%). The company used to be the electronics arm of Singapore Technologies (ST) but after a successful management buy-out in 1997, the company was listed in the Singapore Exchange in 1999. Following a string of acquisitions made over the last two decades, CSE Global has evolved into a technology giant with 30 offices across the world and generated more than 95% of its revenues outside Singapore market.
Currently, CSE derived more than half of its revenue from Americas and about one-third of its revenue from Asia-Pacific. In terms of business sector, CSE derived 76% of its revenue from the oil and gas sector. Therefore, even though CSE has diversified business segments spanning across oil and gas, infrastructure and mining, the ailing oil and gas sector continues to have a devastating effect on the company’s operating results.
In a bid to weather the storm, CSE reduced its global headcount from 1306 in 3Q15 to 1057 in 3Q16. There may be further culling of staff going forward as the management is committed to cost cutting measures in light of massive reduction of new orders from $351 million to $229 million.
Whilst the management has demonstrated discipline in expenses, there were no clear strategies for growing revenue. CSE’s revenue base is too concentrated in the oil and gas sector and given that oil price is forecasted to remain weak for the next few years, there is an urgent need to reduce reliance in this industry.
Although management has not spelt out mitigating actions to address the impact from the dismal oil and gas sector, one promising area that can help CSE to diversify its businesses is its foray in the infrastructure – specifically its capabilities in Intelligent Transport System (ITS).
As Singapore government is rolling out satellite-based Electronic Road Pricing (ERP), CSE Global is well positioned to be the systems integrator for this multi-million project. It is estimated that the tender win may bring in at least $40 million worth of contract value. Another area of the infrastructure segment that may bring in more revenue contributions for is system controls in waste treatment.
Even though I am not vested in this counter, I like this company for its strong balance sheet. Current asset stood at $212.8 million, more than enough to settle the current liabilities of $80.3 million. The company don’t have long-term debts, therefore the net gearing ratio is zero. Cash flow from operating activities for third quarter was $14.9 million, reflecting it’s resilience and ability to generate cash from its business units under the challenging operating environment.
A quick look at SGX’s StockFacts for the past 5 year performance of CSE revealed some interesting trend. Revenue has been falling steadily since 2012, from $448 million to $412 million in 2015. Due to this, the share price has also declined from a high of $0.855 in 2012 to the $0.42 level, a drop of more than 50%.
The Net Asset Value (NAV) for the Group was $0.45 per share and the Net Current Asset Value Per Share (NCAVPS) was $0.26 per share. CSE Global share price is now trading at $0.42, below its NAV. At this level, CSE Global shares may seem like a value buy for investors. However, the reduction of capital expenditure and project deferrals among major oil and gas companies will continue to impact CSE Global’s business. Thus, CSE Global share price is expected to continue its correction mode for the next 12 months. In light of this, I would only enter this counter at $0.30.
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