CSE Global – FY2011 Review

CSE Global had just released their FY2011 results tonight. I have compiled together a 7-year historical P&L and Balance Sheet Statement below:

*Sorry for the size, click on it for full view

Some of my thoughts:

• CSE results wasn’t that much of a shocker given they had already issued a profit warning and FY11 PAT was indeed aligned with the forecast given in its profit warning. Despite experiencing a record plunge in its PAT, I view the result as favourable. Result so was because after factoring in the project overrun cost of S$21.7m, adjusted gross profit is at S$166.2m – only a slight difference from FY10’s sales of S$167.5m. Adjusted gross margin hits 36.4% compared to FY10’s 37.4%. If I add back the cost overrun to PAT, adjusted PAT will be S$49.4m (margin of 10.8%), though it might not be too conservative in adjusting for PAT. However, it does bring to light a different perspective to CSE’s future performance. In its 3Q results, CSE mentioned that 4Q FY11 results will be better than 3Q FY11 & 4Q FY10 but of course, unpredictable events such as the late approval of engineering designs has led to poorer sales. So, suppose such late approval has not happened, I believe CSE results, once adjusted for the project overrun cost, might have been better than FY10.
• Order book has been healthy as well. Though outstanding order book has declined slightly, new orders for 4Q (S$100.5m) should be able to translate into outstanding orders and sustain the order book. *Note that new orders are not a sub-set of outstanding order. There is likely an overlap between the two figures, hence there should be a portion of new orders which are not recognised as outstanding order

• Another positive (inferred) indicator is in its headcount figure (table below). Though I have yet to ask the management with regard to the reason behind it, but in 4Q FY11, net human resource has seen a 111 increase in employees q.o.q – largest ever since FY09!  The largest increase is witnessed under the Americas region, with an increase in  143 employees. Yes, there was the Astib acquisition in 1Q FY11 but I believe the increase of 62 staff should have been factored in the head count from 1Q FY11 onward. And I don’t think CSE has shifted to a labor-intensive business. Hence, could CSE be anticipating huge future sales in the Americas region?

• One of the concerns is the huge amount of debt (S$123.5m) which is to be due in July 2012. With all its debt falling under current liabilities, current ratio has taken a toll to 1.23, quick ratio falling to 0.67 while net gearing increased from 0% to 34.3%. Though the figures alone are alarming, I don’t think it is a critical issue for CSE. With a huge order book (implying good future cash flow), I am sure they will be able to refinance their debt.
• As for the late approval of engineering designs, the result and presentation slides did not offer much clue or details to the incident. I am hoping it is merely a delay in earnings, which means that earnings is likely to bounce back in FY2012. Unfortunately, my request to attain the analyst briefing was unanswered – I reckon they are reserving it for the familiar faces. Nonetheless, I will email them with a set of questions pertaining to FY11 results and hopefully will obtain a better insight into its prospect.

Conclusion – CSE still undervalued

• Overall, I believe CSE is still undervalued though margin of safety might have narrowed slightly. I will have averaged down if the share prices have plunged more but it has remained resistant above my estimated support price of S$0.805. Factoring FY11 results, TTM P/E will be at 16.23x (close price of S$0.87). However, if you believe CSE is able to recover to FY10 earnings (as the management has cautiously forecast), then P/E based on FY10 EPS will be at 8.56x, slightly above the -1 SD of 7.58x. *Historical 5-yrs average TTM P/E is 13.06x, +1 SD of 18.55x and -1 SD of 7.58x*