Professional Documents
Culture Documents
Jan F. Moermann
Havard Chi
www.quarzcapital.com
This presentation is a research report and is for informational purposes only. Opinions expressed are solely those of Quarz
Capital Management, Ltd. and this is not a recommendation to purchase securities discussed herein. This presentation is
confidential and may not be reproduced or distributed without the expressed consent of Quarz Capital Management, Ltd.
Please refer to the next slide for additional disclosures.
Quarz Capital Management
LEGAL DISCLAIMER
DISCLAIMER
As of the publication date of this report, Quarz Capital Management Ltd. and its affiliates (collectively "Quarz"), others that contributed research to this report and
others that we have shared our research with (collectively, the “Authors”) have long positions in and own options on the stock of the company covered herein (CSE
Global Limited) and stand to realize gains in the event that the price of the stock increases. Following publication of the report, the Authors may transact in the
securities of the company covered herein. All content in this report represent the opinions of Quarz. The Authors have obtained all information herein from sources
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2
Quarz Capital Management
Content
• Executive Summary – CSE’s Undervaluation
• Executive Summary – Our Recommendations
• Quarz’s Due Diligence on CSE Global
• The CSE Global Opportunity
• CSE Key Expertise
• CSE Key Markets
• Key Reasons for Undervaluation
• Quarz Recommendations for CSE Global
• Board Lacks Good Reasons to Oppose Quarz’s Strategy
• Potential Total Return for CSE’s Shareholders
• Analysis of Shareholder Base
Quarz believes that CSE can provide a total upside of >40% to all shareholders in the mid-term
with the implementation of Quarz’ Recommendations
Institutional • Strong relationship with research analysts from local and international investment banking firms
Investors and • Discussions and further due diligence with institutional and hedge funds (particularly with those
Analysts who are interested in investing and/or existing shareholders of CSE Global)
140
100
Share
Price S$ Capped S$52m
@ S$ 178m Downside Recurring Revenue Business
80 0.345 Liquid Assets
(Net cash and 1. Generates 2018E Net Income of S$16.5m
working
capital)
60 S$20m
equivalent to
2. Valued at S$198m (Conservative P/E 12x)
40 ~70% of Mkt
Cap
S$48m
20
CSE’s stock price has remained weak despite recovery in oil price:
Brent Crude Oil Price and FTSE Oil and Gas Index normalised to CSE Global’s Brent @
Share Price of S$ 0.46 on 31st Dec 2015 US$67/bbl
Hurricane Harvey and
Nate reduced US oil
--Brent Oil production in GOM
--FTSE Straits Times Oil & Gas
--CSE Global Stabilisation/increase in oil price due to OPEC’s implementation of oil
production cut and stronger global economic growth
Sharp divergence in
Put legend the performance of
CSE’s share price,
Brent oil and FTSE
ST Oil and Gas
Index
Unanticipated Discount to close?
OFAC settlement
loss of S$16.8m Declared interim
dividend (S$
0.0125/share)
6
• Top tier clientele base: Anadarko, BHP, BP, Chevron, Exxon Mobil 60
4
• Competitive advantage driven by sizeable installed base (recurring revenue from 40
maintenance and upgrading projects) 2
20
• Profitability has slumped since 2015 due to reduction of new projects and postponement 0
of maintenance and upgrade capex 0 -2
• Stabilising/increasing oil price has resulted in rebound in enquiries and order book – -20 -4
stronger results forecasted in 2018 Order Book Revenue EBIT (RHS)
Quarz Recommendations
More aggressive adjustment of cost base to adapt to potential new
normal oil price of US$ 50/bbl
• Profitable at oil price of US$ 50/bbl based on maintenance and upgrading contracts
Major partners such as FMC, local asset light peers and suppliers of automation
equipment have demonstrated positive EBIT in 2017
• Minimum Return on Equity (ROE) target of 10%
• Shut down non-viable business units/decrease overcapacity
Quarz Recommendations
Strengthen market share in key markets
Seize more opportunities in ‘smart city’ initiatives
• Integrate acquisitions and key subsidiaries to strengthen capability
• Focus on growing capabilities organically
• Active engagement and participation to secure projects that leverage on
Singapore’s Smart Nation initiative and Australia’s first 15 year infrastructure Plan
CSE has a strong track record in government projects (system integrator in ERP
1 and 2, multiple projects for Ministry of Home Affairs, MINDEF). Track record
from SG can be used to win projects in other markets
CSE supports the South Australia Police/Fire Service, City of Perth, Charles
Gairdner & Royal Adelaide Hospitals, Gold Coast Light Rail Systems, Gladstone
CBD in their digital voice and data infrastructure solutions
Source: Quarz Capital Management, CSE Global Limited
13
Quarz Capital Management
Key Reasons for Undervaluation - 1/4
Items / Comments
Inadequate Cost and Operational Discipline over the Utilization of Substantial Net Cash
Position
• Substantial one-off loss totalling ~S$58m in 2017 did not elicit any changes in Board and top Management
Loss of S$16.8m in OFAC settlement
Write-down of S$38m in account receivables and intangibles
Losses have been labelled ‘legacy issues’ despite most of them present during the occurrences
• Substantial loss of capital has triggered speculations of a reduction in dividend
• ~S$28m used in 7 acquisitions since 2015 have not cushioned the continued sharp slide in profitability
Strategy Misalignment of Board and Top Management’s interest with Shareholders
• Board and top Management’s 2017 remuneration projected to be in excess of >S$3.5m despite weak
Underlying Net Income of >S$13.2m (>25% ratio). Remuneration is more than >100% of Net Profit in
consideration of the substantial one-off loss
• Annual remuneration exceeds the combined value of their shareholdings in CSE
• Sizeable remuneration of S$18m from 2014-2016
Lack of Strategic Direction and Inability of Firm to leverage on New Growth Drivers
• CSE has been unable to leverage on its engineering expertise and track record to secure key projects in
relation to the ‘Smart Nation’ initiative in Singapore
CSE’s board and management has destroyed S$140m of shareholder value (fall in
share price by ~40%) over the last 3 years
• Fall in underlying Net Income by ~65% from S$34m (2015) to S$13.2m (2017)
2017 Net Loss exceeded S$39m when considering settlement and write off of intangibles and
account receivables
CSE’s Board and top Management continue to be well remunerated despite the dire performance of CSE’s
operations and share price performance
Items / Comments
Instil Higher Level of Operational and Cash Discipline
• Immediate distribution of S$18m of excess cash to yield a special dividend of ~10%. CSE retains net cash
of S$30m (S$45m considering increased efficiency in working capital) to capitalise on opportunities
• Commit to pay at least 80% of Net Income as dividend with a dividend pay-out floor of S$12.5m (~7%
dividend yield)
• Emphasize on growing organic capabilities vs acquisitions with high proportion of intangible assets
• Clear Return on Equity target of at least 10% (>S$17.3m per annum)
Seize Growth Opportunities in Structural Growth Areas
Strategy • Take advantage of strong engineering expertise and track record to expand into adjacent areas of growth
• Singapore Smart Nation initiatives and Australia 1st 15-year Infrastructure Plan can provide attractive growth
opportunities
• Establish firm as thought leader in these areas
Increase alignment of Board, Top Management and Shareholder’s Interests
• Transparent link between board and top management’s compensation with total shareholder return
• Increase the proportion of share-based compensation which will vest over the mid-term and open the
fulfilment of clear mid- and long-term performance indicators\
22
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