CSE Global: Temporary Setback, but Strong Growth Prospects
Company Overview
CSE Global Limited (CSE) is a global technology company that provides systems integration and industrial automation solutions, with operations focused on delivering innovative and scalable solutions across critical infrastructure, energy, and manufacturing sectors. With a significant presence in the U.S. and Asia, CSE’s focus on electrification and digital transformation has made it a key player in sectors like LNG terminals, data centers, and infrastructure.
- Ticker: CSE SP
- Current Share Price: S$0.415
- Target Price: S$0.59
- Upside Potential: +42.2%
- Market Capitalization: S$287.6 million
Recommendation
BUY (Maintained)
We maintain our BUY rating on CSE Global with a revised target price of S$0.59, slightly lowered from the previous target of S$0.60. Despite recent challenges, the company’s strong order pipeline and growth in its electrification business present significant upside potential.
Key Reasons for Recommendation & Investment Thesis
- Temporary Setback Due to Arbitration
CSE recently experienced a temporary setback related to arbitration proceedings involving its U.S. subsidiary, Hankin Environmental Systems, Inc. The arbitration stemmed from delays in a construction project in the U.S., primarily caused by COVID-19-related supply chain disruptions and design changes requested by the customer. This resulted in a US$8 million settlement on 8 September 2024. While this negatively impacts the 2024 financials, we view it as a one-time occurrence, not reflective of the company’s overall potential.
- Strong Orderbook and Growth Prospects
CSE boasts a robust orderbook of S$692 million, reflecting a 33% year-on-year growth. The company is benefiting from high demand in electrification and infrastructure projects, particularly in the U.S. market. During a recent site visit to CSE’s U.S. facility, the growth potential became evident, with major cloud service providers relying on CSE for power management systems. This trend positions CSE to capitalize on the ongoing electrification boom in industries such as data centers and LNG terminals.
- U.S. Electrification Business Growth
CSE’s U.S. operations, specifically in the electrification sector, are thriving. The company provides power management solutions to a major cloud provider, and the demand is expected to grow as digital infrastructure expands. The company’s facilities in the U.S. are slated for expansion, from 375,000 square feet across five locations to 600,000 square feet within the next one to two years. This capacity expansion highlights CSE’s readiness to meet the surging demand in the U.S. and is a significant growth driver.
- Emerging Opportunities in Critical Communications and Automation
Beyond its core business in electrification, CSE is actively pursuing acquisitions in critical communications in the Americas, further broadening its service offerings. The company is also focusing on automation projects, seizing opportunities presented by the growing need for smart infrastructure. These emerging opportunities make CSE a well-rounded player in the technology and industrial automation space.
- Attractive Dividend Yield
Investors are likely to find CSE’s dividend yield attractive, as the company is expected to maintain a full-year dividend of 2.75 Singapore cents per share for 2024, translating to a yield of around 6.6%. This is significantly higher than the FSSTI’s average yield of around 4.0%, making CSE an appealing option for income-focused investors.
Financial Overview and Earnings Revision
Despite the arbitration-related settlement, CSE’s core operations remain solid. We have revised down our 2024 earnings estimates by 27% to account for the one-off loss from the settlement. However, the company’s prospects in 2025 and beyond remain robust, and we expect earnings to grow by 12% in 2025 and 8% in 2026, driven by strong execution and the growing order pipeline.
- 2024F Revenue: S$860.1 million
- 2024F Net Profit: S$21.9 million
- 2025F Net Profit: S$29.3 million
Valuation
Our target price of S$0.59 is pegged to 13x 2025F P/E, based on the company’s strong growth prospects and dividend potential. At the current price level, the stock offers a compelling risk-reward proposition, especially given its attractive dividend yield and growth potential in the U.S. market.
Share Price Catalysts
- Large Infrastructure Project Wins: As CSE continues to secure high-value infrastructure projects, particularly in electrification and data centers, we anticipate positive share price momentum.
- Accretive Acquisitions: CSE’s ongoing focus on acquisitions in the critical communications and automation sectors presents additional upside potential, further boosting investor confidence.
Risks to Consider
- Execution Risks: CSE operates in a project-based business, which exposes it to risks of cost overruns and delays. The recent arbitration underscores the potential downside of execution challenges, particularly in the U.S. market.
- Macroeconomic Headwinds: The global economic environment remains uncertain, particularly in sectors such as infrastructure and energy. Any slowdown in these areas could impact CSE’s order flow and profitability.
Conclusion
CSE Global’s temporary setback from the arbitration proceedings should not overshadow its long-term growth prospects. The company’s strong orderbook, robust U.S. business, and attractive dividend yield make it a compelling investment. We maintain our BUY rating, with a target price of S$0.59, presenting an upside of over 42% from the current share price
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