Clearer skies… but by no means blue

After a tepid 1H11, we expect 3Q11 results to bring some cheer to investors. Execution hiccups should be largely behind. However, skies are no means blue with macro headwinds threatening earnings growth.

We are projecting a much improved 3Q11, with S$15m earnings and around S$190m of orders, backed by a normalised order refill rate of about S$100m per quarter and above-S$83m Middle East orders. We project S$150m of orders for 4Q11, again backed by a normalised order refill rate and a sizeable Australia LNG contract. We expect CSE to clinch S$550m of orders in FY11 (5% higher than the record orders of S$524m in 2009). A solid backlog would give earnings visibility into 2012.

Buoyed by LNG project developments, Australia provides the best growth prospects for CSE. The group is bidding for a couple of sizeable turnkey telecommunications orders which could exceed S$50m (per project) over three years of execution. It had won a turnkey telecommunications contract for a PNG LNG project earlier in the year. Contributions are expected to grow with further
planned awards. We understand that CSE is in the final tendering for one of the LNG projects and we expect a contract award in 4Q11.

Middle East woes
CSE has underperformed the FSSTI YTD by 22% as the market punished it for its 2Q11 loss shocker from execution problems at two Middle-East projects. The Arab Spring also affected its order intake more than feared. While we are projecting a turnaround in 3Q after a tepid 1H11, macro headwinds and lower contributions from the Middle East could still threaten earnings growth.

Not immune to slowdown…
Despite the robustness of its business, CSE was unable to fight the recession of 2009. There was a 10% dip in its earnings that year, its first decline since 2001. The slip was due to flat orders from the prior year and weaker contributions from Southeast Asia and the Americas.

Earnings growth held back
Taking a leaf from the previous downturn, we expect CSE’s earnings growth to be weaker than the
market’s more-bullish expectations.

We cut our earnings estimates for 2011-13, although they still imply 12% growth for 2012 over 2010 and 11% yoy growth for 2013.

50% downside to trough
Our target price has been lowered to S$0.76, after rolling forward to 6x CY13 P/E, the bottom end of its trading range (previously S$0.96, 7x CY2 P/E). During the last financial crisis, CSE traded at a trough of 3x forward P/E. Its 1-year mean of 6x P/E during the last cycle forms our new valuation basis. Following our earnings and target-price downgrade, we see 50% downside to trough  valuations.