UOB Kay Hian (UOBKH) lowered its target price for CSE Global 544 : 544 0%to S$0.59 compared to S$0.68 previously, but maintained its "buy" call, reflecting a more cautious outlook on the oil and gas segment as well as expectations of potentially higher operating costs.

In a research note on Monday (Nov 15), analyst John Cheong said that the technology solutions provider's earnings for the third quarter were "in line with expectations".

The group saw a 1.9 per cent dip in revenue year on year for Q3 2021, as well as a 22.7 per cent fall in earnings before interest, taxes, depreciation, and amortisation.

The earnings drop was mainly due to higher selling and distribution costs in preparation for the resumption of sales activities in key markets, combined with higher unabsorbed labour costs, noted Cheong.

He also expects fewer large greenfield and flow projects due to supply chain disruptions and travel restrictions resulting from the Covid-19 pandemic. The last time the group secured a large greenfield project from the government was in Q4 2018, the research house wrote.

"Capital spending remained measured in the energy sector and led to fewer large greenfield and flow projects in Q3 2021 and foreseeably in the coming months. Coupled with higher operating and sales costs, this further impacted CSE's performance in the American region and CSE expects similar challenges in the coming quarters," said Cheong.

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However, the analyst is "positive" for the mining sector on the back of increasing demand for digitalisation and enhancements in physical and cybersecurity which has translated into a continuous, steady project pipeline in the infrastructure and mining and minerals sectors.

UOBKH expects the group to maintain its full-year dividend at S$0.0275 per share for 2021, translating into an above-average dividend yield of 5.3 per cent, as compared to the FTSE Straits Times Index indication of 4 per cent.

"We believe this is sustainable, given CSE's strong operating cash flow and low net gearing," added Cheong.

The new target price is 13 per cent lower than the previous one, and is pegged at 11.4 times estimated earnings for 2022. UOBKH's previous target was 13 times the estimated earnings for 2022.

The new target price implies a dividend yield of 4.7 per cent and reflects UOBKH's more cautious outlook on the oil and gas segment, as well as potentially higher operating costs, said Cheong.

Overall order intakes for the group grew by 32 per cent to S$120 million, due to the recovery in energy sector orders, which increased 52.3 per cent year on year to S$73.8 million, from newly awarded power and electrification projects and higher-flow work, he noted.

The analyst also pointed out that despite the impact of Covid-19, CSE's infrastructure segment saw its Q3 2021 order intakes grow by 18.6 per cent year on year to S$35.9 million, owing to higher orders of radio communication equipment and solutions, mainly driven by government customers in Australia.

"Earnings momentum from these segments should be sustained with greater order intake and growing orderbook, supported by increasing requirements for digitalisation and enhancements in physical and cybersecurity," Cheong said.

Read more: 

• CSE Global H1 profit falls 33.3% amid volatile energy prices, US winter

• CSE secures S$104.4m in new orders in Q2