CSE Global: Validation of Electrification Prospects

CSE Global, a global systems integrator, is well-positioned to benefit from multi-year growth trends such as electrification and the oil and gas (O&G) cycle. The company’s energy, public infrastructure, and data-center segments are projected to grow strongly, making it an attractive investment proposition.

Key Developments

CSE sold its U.S. facility in Texas to Gladstone Commercial Ltd for USD 29.25 million, with a net book value of USD 17.8 million. The sale is expected to generate a post-tax gain of USD 8.6 million, offsetting a one-time USD 8 million settlement incurred in September 2024. The company plans to lease back the property from the buyer for an estimated annual rental of USD 2.5 million.

Expansion Plans

The proceeds from the sale will be used to acquire a larger facility in the U.S., anticipated to be more than double the size of its existing property. This move underscores management’s confidence in the electrification business, particularly in U.S. data and utilities centers. The company is also exploring states with favorable tax incentives to maximize growth potential.

Financial Outlook

Revenue is projected to grow from SGD 853.5 million in FY2024 to SGD 968.4 million in FY2025. Core net profit is expected to rise by 29.8% in FY2024 and 5% in FY2025. The net margin is forecasted to grow year-on-year, supported by potential share buybacks and reduced gearing. The target price has been revised upwards to SGD 0.64, reflecting a 57% upside from the current share price of SGD 0.43. The recommendation remains a “Buy.”

ESG and Sustainability

CSE Global has made strides in sustainability, including reducing its paper consumption index and planning to disclose a Task Force on Climate-Related Financial Disclosures (TCFD) roadmap. However, long-term greenhouse gas reduction targets remain unmet, requiring further efforts.

Investment Highlights

Strong Dividend Yield

CSE Global offers an attractive dividend yield of 6.3%, maintaining its historical payout of SGD 0.0275 per share. The company may conserve cash for potential mergers and acquisitions if lucrative targets arise.

Valuation and Peer Comparison

Trading at a significant discount compared to its peers, the company’s strong order book of SGD 633.6 million as of September 30, 2024, further bolsters investor confidence. The forward P/E for FY2025 is 8.7x, which is notably lower than the industry average.

Growth Catalysts

• Strong NPAT growth of 250% in FY2023 and 30% in FY2024.
• Expansion in the U.S. electrification market.
• Potential M&A activities to boost profitability.

Risks and Challenges

Execution Risks

Cost overruns and potential execution errors could impact profitability. Additionally, supply chain disruptions and foreign exchange fluctuations pose risks due to the company’s global operations.

Economic Downturns

A potential recession may lead to slower business activity and order inflows, affecting the company’s financial performance.

Key Metrics and Financial Projections

Revenue and Profitability

Revenue is expected to grow at a compound annual rate, reaching SGD 1,101.9 million by FY2026. EBITDA margins are projected to improve to 4.4% over the same period. Core net profit is forecasted to rise consistently, hitting SGD 40.2 million by FY2026.

Balance Sheet Strength

CSE Global maintains a strong balance sheet with declining net gearing, which is expected to turn into a net cash position by FY2026. Cash reserves are projected to grow to SGD 98.1 million by FY2026, providing ample liquidity for expansion and shareholder returns.

Key Ratios

• P/E Ratio: Improves from 10.6x in FY2024 to 7.1x in FY2026.
• Net Gearing: Declines from 11.0% in FY2024 to net cash in FY2026.
• Dividend Yield: Steady at 6.5% over the forecast period.