This will likely be welcome news for CSE, which has faced supply chain issues since the third quarter of its FY2021 ended December 2021, affecting equipment deliveries and project revenue recognition.
“We understand from management that the group has similarly adopted a more positive tone on equipment delivery times, which we believe could indicate that 2QFY2023 recorded a q-o-q improvement in delivery times,” says Tan and Lim.
After seven consecutive quarters of supply chain woes, the analysts believe that 2Q2023F could be an “inflection point” for CSE as the group accelerates recognition of its record high order book as at end-1QFY2023.
They see upside to their revenue assumptions for US energy projects, where order book recognition has been lagging compared to other segments given the reliance on more specialized equipment, as well as in Australian infrastructure, where supply chain issues have hampered projects more than in CSE’s other core markets.
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As such, the CGS-CIMB analysts have raised their FY2023 to FY2025 revenue forecasts by 11% to 13% after baking in increased energy and infra execution.
They expect CSE’s 1HFY2023 core net profit to rebound to $7 million to $8 million, or a 54% to 76% increase y-o-y, as 1HFY2023 revenues see a growth of 25% to 30% y-o-y. This improvement will be driven by strong infrastructure growth backed by a sizable infrastructure order book of $265 million at end-1QFY2023 and a ramp-up in project executions across all segments.
Due to these higher revenue assumptions, Tan and Lim have also lifted their FY2023 to FY2025 core earnings per share (EPS) estimates by 9% to 21%.
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Citing a “clearer earnings recovery trajectory, their increased target price of 45 cents is based on a 12x 2024 price-to-earnings ratio (P/E) compared to the previous 10.8x P/E estimate.
Despite the increased target price, the analysts have retained our “hold” call on valuation grounds as CSE is already trading at 11x 2024 P/E, or around 0.3 standard deviations (s.d.) below its historical mean, which they believe adequately prices in the group’s expected earnings recovery ahead.
Their upside risks include strong infrastructure order wins and the signing of large greenfield energy projects. On the other hand, downside risks include margin erosion from rising costs, prolonged supply chain disruptions and a sharp decline in order wins.
As at 3.34pm, shares in CSE were trading 0.5 cents or 1.12% down at 44 cents.
