CSE Global engineers growth through diversification and acquisitions

KEEPING a spotless incident record is no mean feat for CSE Global. The global technology and systems integration company sees its process control solutions employed for the production of oil on both onshore and offshore rigs, in addition to having a presence in the mining and mineral industry.

"We are a people business, an engineering and system integration company providing process control, automation, and communication and security solutions to our customers in the oil and gas, infrastructure and mining industries. We engineer, procure, and integrate systems and solutions to fit the customer's needs," says CSE Global's chief financial officer Eddie Foo.

Eighty per cent of what the company does is in process control, automation and remote monitoring. The remaining 20 per cent falls under communications and security.

CSE Global's largest revenue contributor is in engineering process control solutions, which refers to the process of monitoring an industrial process's operational variables such as temperature, pressure or chemical content. The collected data may then be used in real time to adjust input variables for achieving a desired production output.

CSE Global's strength lies with a core team of engineering directors. "Typically we keep the core engineering team intact, to retain their technical knowledge and as a key customer contact point in the geographic location they are based in," says Mr Foo.

Big names such as BP, Shell, Exxon and Aramco have ongoing contracts with CSE Global. The oil and gas (O&G) industry constitutes slightly under 65 per cent of CSE Global's Q3 2019 total revenue of S$111.5 million, reflecting a major exposure to the capital expenditure of major oil players for order book contributions, and oil prices by extension.

CSE Global shares plunged more than a third after an oil slump in 2014, when crude oil benchmark Brent fell to S$80 per barrel in December that year. A year earlier in 2013, the company's shares were trading above the dollar, which then dropped to around 60 cents after the slump. CSE Global shares are trading at S$0.525 as at market close on Dec 6.

"We do have some impact, but it's quite limited as the bulk of the current business is flow revenues such as maintenance, system enhancement and upgrades and small greenfield orders from our existing installed base," says Mr Foo. "In our oil and gas segment, we are mainly in production stage of the value chain. Production has not really come down; it is still very well supported by demand. Besides, CSE has been growing and diversifying its business to support investments in infrastructure projects in markets such as Australia and Singapore."

The engineering company has since made steps to curtail such shocks in the future, by positioning their services towards the maintenance of oil plants and leveraging on asset specificity, as well as diversification into other industries. A zero major incident track record, as well as keen knowledge of current client systems, builds up a close relationship with its major clients.

CSE Global's O&G operations are mainly based in the Americas, which exists outside of the OPEC cartel's production quotas. The region brought in S$67.8 million, or 60 per cent, of the company's third quarter revenue.

Crude and shale oil in the United States display double digit growth, with crude oil production rising 33.7 per cent to over 12.4 million barrels per day (mbpd), and shale oil rising higher at 40.6 per cent to nine mbpd, which presents good opportunities for additions to the order book for CSE Global. "Growth regions are typically Australia and the Americas. Our onshore activity, like shale production for example, is pumping quite nicely in the Permian Basin and Eagle Ford, areas that we are present in," says Mr Foo. "They have done well in the last two years."

O&G players look to oil prices to budget capital expenditure, which is then spent on upstream exploration and production (E&P) of oil. Bullish oil prices should result in more contracts available for tender.

Earlier in October, CSE Global secured two large O&G greenfield projects in the Americas worth a total of S$103.7 million. "This is testament to our customer's confidence in us as they continue to leverage on our expertise and placing their trust in our solutions and services," says Mr Foo.

The exposure to oil prices is further mitigated by offering a diverse set of products. In addition to providing process control solutions in the O&G industry, CSE Global offers communications and security solutions for infrastructure and the mineral and mining industries as well. Infrastructure contributed S$28.9 million, or 26 per cent, while mining and mineral contributed S$11.2 million for the remaining 10 per cent.

Singapore's Smart Nation Initiatives will drive spending for process control systems and security systems for the collection, monitoring and management of data. With the launch of more government projects for its Smart Nation Initiative, CSE Global could clinch more orders in its infrastructure segment through the provision of these services.

The Housing Development Board (HDB) has announced tenders for the installation, operation and management of some 6,000 digital display panels, in line with the Smart Nation Initiative. Historically, CSE Global was awarded two sub contracts totalling S$21 million to upgrade and maintain the Electronic Road Pricing (ERP) system in 2004, and it remains well poised as a network systems integrator to service further projects under the initiative.

The company released its third quarter financials earlier on Nov 6, showing healthy growth of 21.9 per cent in revenue to S$111.4 million in Q3 2019, up from S$91.4 million last year. Earnings before interest and tax (EBIT) saw a rise of only 2 per cent to S$6.9 million, from S$6.8 million last year, due to a one-off capital expenditure for the S$34.8 million purchase consideration of Houston based electrical integration and solutions company Volta, LLC.

Concluded earlier in September this year, Volta's acquisition was on the basis of a "compelling opportunity to enter a market which is in very close proximity to existing markets", according to the company's announcement. "This acquisition is earnings accretive with a good cash flow generation," says Mr Foo. "It was mostly financed via a bank loan with a floating interest rate linked to the USD LIBOR."

The acquisition is line with CSE Global's growth plan, as the company looks to vertical integration. "We grow by extending our value chain, to extend our range of service that we provide. This helps us to aggregate products and services together to create a strong value proposition to our customers. Most of our engineering services are customised to suit the customer's requirements, and this allows us to work long term with our clients," says Mr Foo.

On CSE Global's near future, Mr Foo states that the board is "cautiously optimistic" on seeing an upward trend on activity levels in the O&G industry, supported by positive cash flow from the company's Big Oil clients.

"With a robust order book, stable margins and steady flow business, the outlook for the company is positive," says Mr Foo in conclusion. "As a group, we are continuously looking out for value accretive and strategic acquisitions to grow our business to ensure a diversified and sustainable income stream."