CIMB: CSC Holdings at $0.36

CSC Holdings CIMB @ S$0.32 (24 Sep 2007)

- Initiate Coverage, netural
- Target Price: S$0.36 - Initiate Coverage
- Construction
- Lawrence LYE +65 6210-8994 – lawrence.lye@cimb.com


Largest ground engineering specialist


• Largest foundation specialist.

CSC is the region’s largest foundation and ground engineering specialist, following its integration of L&M Foundation Services, G-Pile and Soil Investigation. It can offer an extensive suite of services unmatched by any competitor. We believe it is a prime candidate to be involved in major infrastructure projects to be announced.

• Strong order book of S$387m.

CSC’s latest order book is S$387m, including S$294m from the Marina Bay Sands integrated resort project. This will be for piling and diaphragm walls. Work had only started in Aug 07 and is expected to be completed in Feb-Apr 08. Management is optimistic that its equipment will be fully deployed after the completion of its work at Marina Bay given the good visibility of
contract schedules.

• Robust FY07.

FY07 net profit of S$9.3m rose 112% yoy on the back of strong demand in the construction sector. Gross margins climbed to 16% from 14.4% in FY06, due mainly to improved equipment rental rates and internal rationalisation of operations for better efficiency. FY07 revenue expanded 18.1% yoy to S$126.7m on an increased number of contracts.

• Initiate with Neutral and target price of S$0.36,

set at 15x CY08 P/E, comparable to valuations for SGX-listed peers involved in the construction industry. CSC’s strong order book appears to have been priced in at 13.3x CY08 P/E, despite our 3-year core earnings CAGR forecast of 49.4%.

Background

CSC began in 1975 as Ching Soon Engineering to undertake excavation and Hsection steel piling work. In 1979, the company diversified into reinforced concrete piling and other general civil engineering work. CSC was incorporated in 1997 as the holding company for the group and was listed on the SGX in Apr 98.

In Nov 06, CSC acquired L&M Foundation Services Pte Ltd, a specialist contractor in heavy foundation piling, earth retaining systems and design-&-build services. In Apr 07, one of Singapore’s leading site investigation companies (Soil Investigation Pte Ltd) and Malaysia’s leading hydraulic jack-in pile company (G-Pile Sistem Sdn Bhd) became members of the CSC Group.

Through rapid organic expansion and a series of acquisitions, CSC is now the leading and largest specialist contractor in foundation and geotechnical work in Singapore. The group is recognised as a leading specialist contractor in foundation and geotechnical engineering with strong design-&-build capabilities. CSC is licensed by the Singapore Building & Control Authority (BCA) with a category L6 rating which allows it to tender for projects of unlimited value. In fact, it is a partner to many building and civil engineering contractors in precast construction products and steel
fabrication, including welded steel fabric. The sale and leasing of foundation engineering equipment is another new business the group expanded into in regional markets.

Some high-profile foundation engineering projects that were completed between FY03 and FY06 included bored piling for The Pinnacle @ Duxton and driven piling for oil storage tanks on Jurong Island.

Company outlook

CSC is optimistic of its outlook for FY08.
The construction cycle has just begun and the upswing is expected to provide strong demand for CSC’s specialised capabilities. Driven by increased private en-bloc redevelopment and public-sector initiatives to beef up infrastructure for its population target of 6.5m, the construction sector in Singapore is expected remain sustainable over the next few years. 2Q07 industry growth was 17.9%, the strongest in almost 10 years, after an 11.6% gain in 1Q07. BCA forecasts S$19bn-22bn worth of construction projects in Singapore. In addition, there is increasing acceptance of design and build in construction methods and this increasingly depends on contractors’ resources and expertise.

Construction industry momentum.
The industry is gaining momentum in light of major projects such as the integrated resorts at Marina Bay and Sentosa, Marina Bay Financial Centre, MRT extensions, Jurong Island underground cavern, Sports Hub, en-bloc redevelopment projects, several building and construction projects in the Orchard Road area and various developments in the petrochemical and pharmaceutical industries. With its enhanced size and capabilities following the acquisitions of L&M and Soil Investigation in Singapore and G-Pile Sistem in Malaysia, CSC is in a position to undertake major foundation engineering projects and increase its market share.

Order book

CSC’s order book has increased to S$387m, including the recently secured Marina Bay Sands integrated resort project. This contract worth S$240m was awarded to its subsidiary, L&M, for piling and diaphragm walls. Work had only started in Aug 07 and is expected to be completed in Feb-Apr 08. An additional S$54m was awarded to CSC in Jul 07. Meanwhile, the group should enjoy a steady flow of income from this and other projects in its pipeline.

Risks

Prolonged significant equipment downtime. Any prolonged significant equipment downtime may cause major disruptions to operations, and affect CSC’s financial performance. Equipment downtime occurs when machinery are sent for service or repair instead of being utilised for revenue-generating purposes. However, CSC mitigates this risk by maintaining a large fleet and a comprehensive and regular maintenance programme.

Reliance on skilled labour. The industry faces the perennial problem of a shortage of skilled labour at all levels, especially during the current construction boom. With a small local construction labour force, the industry is highly dependent on foreign workers and contractors are vulnerable to shortages and high employment costs of foreign workers, while competition for experienced workers is intense. Exposure to cyclical nature of construction industry. CSC is exposed to the cyclical fluctuations of the construction industry. A cyclical downturn, including delays or the cancellation of construction projects, will have a significant adverse financial impact.

Management

Mr See Yen Tern is Executive Director and Group Chief Executive Officer. Mr. See has over 20 years of experience at senior management levels in various industries and has held such positions as Chief Financial Officer, Executive Director and Deputy Group Managing Director in both listed and non-listed entities in Singapore, Indonesia, Hong Kong, China and Australia.

Mr Poh Chee Kuan is Executive Director and Chief Executive Officer (Foundation & Geotechnical Engineering). He joined the group as an Executive Director in Sep 99 and is currently the Chief Executive Officer of the group’s core business in foundation and geotechnical engineering. He has more than 30 years of professional and business experience in the fields of civil/foundation engineering.

Mr Teo Beng Teck is Executive Director. He joined the board as a Non-Executive Director in Nov 03 and was appointed an Executive Director on 15 Jan 07. He has more than 30 years of experience in engineering and construction in both the public and private sectors.

Financials

Rising gross margins. FY07 net profit of S$9.3m rose 112% yoy on the back of strong demand in the construction sector. Gross margins rose to 16% from 14.4% in FY06, due mainly to improved equipment rental rates. FY07 revenue expanded 18.1% yoy to S$126.7m on an increased number of contracts.

Net cash of S$0.3m. ROE improved from 8.4% in FY06 to 10.9% in FY07. Cash flow from operations deteriorated somewhat, possibly due to increased business volume, at over S$4m in FY07. The figure could be better in FY08 with the improved business outlook.

Valuation and recommendation

Initiate with Neutral and target price of S$0.36, set at 15x CY08 P/E, comparable to valuations for SGX-listed peers involved in the construction industry. CSC trades at 13.3x CY08 P/E against a 3-year core earnings CAGR forecast of 49.4%.