GEORGE TOWN, Cayman Islands, Feb. 26, 2018 /PRNewswire/ -- Quarz Capital Management, Ltd. (QCM), an investment manager, today issued a letter urging CSE Global Limited to take immediate steps to address the severe undervaluation of its share price and implement decisive steps to unlock a potentially attractive total return of >40% for its shareholders.
QCM proposes that CSE distributes S$18million (~10% dividend yield) of its S$48million net cash, while continuing to retain a sizable net cash balance in excess of S$30million to execute on strategic plans and capitalize on opportunities. QCM also urges CSE to commit up to 80% of its yearly Net Income as dividend with a dividend payout floor of S$12.5million (~7% dividend yield). This is in view of the substantial net cash balance and capex-light nature of CSE's existing business. The proposed capital return policy will instill a higher level of cash and operational discipline in the firm.
To enhance CSE's target return on equity, QCM recommends the firm to right-size its US business, integrate subsidiaries and new acquisitions, reduce corporate expenses and execute new growth strategies. QCM calls on management to seize opportunities in structural growth areas such as the infrastructure segment in Singapore and Australia (through Singapore's Smart Nation initiatives and Australia's 1st 15-year Infrastructure Plan). By capitalizing on CSE's strong engineering expertise and track record in implementing communication, control and surveillance systems, the firm can expand its range of services and establish itself as one of the thought leaders in these areas.
QCM also proposes an increased alignment of board, top management and shareholders' interests by reviewing board and management's remuneration package. Alignment of interest can be achieved through a transparent link between board and top management's compensation with total shareholder return as well as increasing the proportion of share-based compensation which will vest over the mid- and long-term.
QCM believes that its recommendations will provide a clear pathway to deliver a significant potential return or all shareholders. QCM has delivered the following letter to CSE Global Limited's management team, board of directors and other stakeholders.
QUARZ CAPITAL MANAGEMENT, LTD. ISSUES OPEN LETTER TO
THE MANAGEMENT AND BOARD OF CSE GLOBAL LIMITED (SGX: 544)
"IMPORTANT DISCLOSURE INFORMATION"
AT THE END OF THE ATTACHED LETTER
Quarz Capital Management, Ltd.
Clifton House 75 Fort Street
George Town I KY1-1108 I Grand Cayman
Cayman Islands
26 February 2018
TO ENGAGE ON THE PROPOSALS FOR THE RETURN OF EXCESS CAPITAL, RIGHTSIZING OF COST BASE, GROWTH STRATEGY AND THE ALIGNMENT OF BOARD, MANAGEMENT AND SHAREHOLDERS INTERESTS
- POTENTIAL TOTAL RETURN IN EXCESS OF 40% OVER THE MID-TERM -
Dear Mr Lim, Mr Foo and Members of the Board,
Quarz Capital together with its affiliates have built up a sizeable position in CSE Global (the "Company", "Firm"," "CSE SP", "CSE Global" or "CSE"). We, together are among the top 10 shareholders of the firm and hold a substantially larger shareholding than the current management and board of CSE combined.
CSE's share price has slumped by over 40% since 2015 despite the firm's 'cash rich' balance sheet with net cash and net-working capital (ex-net cash) positions of more than S$48million[1] and S$72[2]million respectively (~27% and ~41% of market cap[3]). While the fall in oil price has decimated many Oil & Gas service companies in Singapore, CSE generated S$13million of underlying Net Income (ex-one offs) in 2017 mainly from its infrastructure business segment. With the upswing in commodity prices and already secured orderbook, we estimate that the increase in contributions from the firm's Oil & Gas (O&G) and Mining segments will result in a Net Income in excess of S$16million in 2018E. As a result, the firm will trade at an attractive P/E 2018E of 11.1x, 8.1x (ex-cash).
Apart from the correction in commodity prices, we believe that the severe undervaluation of CSE's stock price is attributed to the following key reasons:
| [1] We classify CSE's S$31.4million of short term loans under working capital and exclude it from the calculation of net cash as this sum is mainly short-term financing for the purchase of equipment and services for clients' projects (which clients have committed to purchase) |
| [2] CSE's S$31million of short term loans is included here |
| [3] CSE's Share Price and Market Cap of S$0.345 and S$178million respectively (23 February 2017) |
The prolonged disappointing performance in CSE's share price requires immediate action to preserve the long-term interest of shareholders. In our CSE Value Creation Proposal, we provide readily available and actionable steps which we urge CSE's board to consider and implement to unlock a potentially attractive total return of >40% for shareholders:
Having extensively evaluated CSE's business, on further price weakness of the firm due to weak execution, we and our affiliates are prepared to increase our shareholding. We reserve our rights to propose measures in AGMs and EGMs including the election of board members who can advance strategies to increase value for shareholders. Other shareholder value accretive strategies can include the sale of all or part of the firm to parties who recognize the intrinsic value of the firm.
CSE Global in Summary
CSE was spun off from ST Engineering in the 1990s and has established itself as one of the top control and communication system integrators for the offshore Oil & Gas and materials industries. The firm has partnered with blue chips such as BP, Conoco Phillips, Fluor, Samsung, Technip, China National Petroleum (CNPC) and BHP Billiton in the installation and maintenance of supervisory, control, safety and communication systems for their infrastructure (pipelines, wells, production facilities). While the low commodity prices have put off capex spend in these industries, the need to maintain, service and upgrade the existing systems to meet production and safety requirements and the 'stickiness' to the integrator who installed the system (due to the high cost and possible disruption of switching to another service provider) will continue to provide recurring income to the firm.
CSE has maintained the current ERP system since its commission in 1998 and is also part of the consortium which will implement the S$556million next generation ERP-2 project. The firm has also undertaken projects both directly and as sub-contractors for various government ministries including the Land Transport Authority (LTA), Ministry of Defence (MINDEF) and Ministry of Home Affairs (MHA).
In Australia, the firm is a majority shareholder of Orion, the largest commercial Digital Mobile radio (DMR) 2-way radio network operating across the country and services clients in critical sectors such as airports, ports, public safety, local government and transportation networks. These users are unable to rely on public cellular networks which are often disrupted (due to overloading) during natural disasters and other emergencies. The firm also has a strong track record of implementing communication systems for clients such as the Victoria Emergency Services Telecommunications Authority, Royal Adelaide Hospital, South Australian Country Fire Services, Sir Charles Gairdner Hospital, Adelaide to Darwin Rail Project and the Gold Coast Light Rail System.
| [4] CSE reported a net cash position of S$48million in 2017 Full Year result. The firm will tentatively pay out S$7.8million (~4.3% dividend yield) in May 2018 for 2017's final and special dividend. During this period, the firm is estimated to generate at least the same amount of net profit and cashflow |
Lack of Operational and Cash Discipline
CSE reported a substantial one-off loss totaling ~S$58million in 2017 attributed to the Office of Foreign Asset Control (OFAC) settlement and the write down of its account receivables in EMEA and intangibles relating to its Oil & Gas business. As shareholders, we were surprised at the lack of reaction and changes to the board and top management in consideration of the significant loss of shareholder value. The majority of the current board and top management team were present when the occurrences took place.
CSE's underlying net profit has also fallen by more than 50% from 2015 despite the firm spending more than S$28 million in acquisitions during that period. The complete divestment of Servelec (one of CSE's key subsidiaries) through an IPO was grossly short-sighted as CSE did not retain any stake in the company. Servelec was taken over by Montagu in Nov 2017 at GBP 3.135/share (75% above its IPO price), costing CSE's shareholders more than S$165million (~90% of CSE's current mkt cap) in proceeds.
Misalignment of interests among board, top management and shareholders
The substantial loss of capital has triggered speculations of a reduction in dividend due to the lower net cash balance. Despite the severe underperformance of CSE's share price and the net loss of S$39million suffered by the firm, top management and board is projected to pay themselves in excess of S$3.5million with remuneration increasing to more than 25% of 2017 underlying net profit (or 100% of net profit in consideration of the loss). Annual remuneration exceeds the combined value of top management and board's shareholding in CSE.
Board and top management have allowed CSE's key subsidiaries to operate independently which further increase corporate layers as well as management and corporate expenses.
Lack of strategic direction and inability of firm to leverage on new growth drivers despite engineering expertise
In addition, CSE has not been able to leverage on its strong engineering expertise to secure key projects in relation to the 'Smart Nation' initiative in Singapore.
CSE Global Value Creation Proposal
Our recommendations provide clear executable steps that the Board and management can readily undertake to increase shareholder value:
Recommendation 1: Immediate distribution of S$18million (10% dividend yield) of the S$48million of net cash position
CSE will continue to retain a net cash balance in excess of S$30million which can potentially increase to ~S$45million given increased efficiency in the usage of working capital (~S$72million). The remaining net cash balance is more than sufficient to execute on strategic plans and capitalize on opportunities.
Recommendation 2: Commit to pay at least 80% of Net Income as dividend with a dividend payout floor of S$12.5million (~7% dividend yield)
This is in view of the substantial net cash balance and capex-light nature of CSE's existing business. We believe that our proposed capital return policy will instill a higher level of cash and operational discipline in the firm.
Recommendation 3: Target Return on Equity of >10% (>S$17.3million of annual income)
This can be achieved through the rapid rightsizing of CSE's US business to realize profitability at oil price of >US$50/bbl, integration of subsidiaries and acquisitions to reduce duplicity and corporate overheads and an accelerated execution of a growth strategy. The upswing in commodity prices can provide further tailwinds to the firm in growing revenue and profitability.
Recommendation 4: Seize growth opportunities in structural growth areas such as the infrastructure segment in Singapore and Australia (Australia 1st 15-year Infrastructure Plan, Singapore Smart Nation initiatives)
In our view, CSE's transition to a professionally managed firm has diminished its 'can do' spirit of entrepreneurship. This motivation force was the key driver to the management buyout of CSE in the 1990s and the firm's successful expansion thereafter. Focus has now been targeted at margins and cashflow instead of organic expansion into new growth areas.
We call on management to take advantage of CSE's strong engineering expertise and track record in implementing communication, control and surveillance systems and expand into adjacent areas of growth. Both Singapore's Smart Nation initiatives and Australia 1st 15-year Infrastructure Plan provide attractive growth areas which CSE can expand its services into. We believe that the firm can establish itself as one of the thought leaders in these areas.
Recommendation 5: Increase in alignment of board, top management and shareholders' interests
We support a clearer link between board and management's remuneration and the total return for shareholders over the mid to long-term. In this respect, we propose their compensation package to include a sizeable proportion of share-based compensation which will vest over the mid-term and upon the fulfillment of transparent mid and long-term key performance indicators.
Conclusion
We firmly believe that the execution of our Value Creation Proposal can provide a clear pathway to deliver a significant potential return of more than 40% for all shareholders in the mid-term. CSE continues to retain sufficient cash balance as buffer and to take advantage of opportunities. An 'energized' CSE with the tailwinds from stabilizing commodity prices and revenues from new growth areas can deliver sustainable returns to shareholders over the long term. As long-term shareholders, Quarz looks forward to working with CSE's management team and share our thoughts on the significant opportunity at CSE Global.
Sincerely yours,
Mr. Jan F. Moermann
Chief Investment Officer, Quarz Capital Management, Ltd.
Mr. Havard Chi, CFA
Head of Research, Quarz Capital Asia (Singapore)
For further information, please contact:
Havard Chi, CFA (hch@quarzcapital.com, +65 9433 3898)
enquiries@quarzcapital.com
About Quarz Capital Management
Quarz Capital Management, Ltd. is a value oriented and research driven investment advisory firm that seeks to earn above average, long-term returns by identifying value investments across the globe.
Important Disclosure Information
SPECIAL NOTE REGARDING THIS LETTER
THIS LETTER CONTAINS OUR CURRENT VIEWS ON THE VALUE OF CSE GLOBAL LIMITED'S SECURITIES AND ACTION THAT CSE GLOBAL LIMITED'S BOARD MAY TAKE TO ENHANCE THE VALUE OF ITS SECURITIES. OUR VIEWS ARE BASED ON OUR ANALYSIS OF PUBLICLY AVAILABLE INFORMATION AND ASSUMPTIONS WE BELIEVE TO BE REASONABLE. THERE CAN BE NO ASSURANCE THAT THE INFORMATION WE CONSIDERED IS ACCURATE OR COMPLETE, NOR CAN THERE BE ANY ASSURANCE THAT OUR ASSUMPTIONS ARE CORRECT. CSE GLOBAL LIMITED ACTUAL PERFORMANCE AND RESULTS MAY DIFFER MATERIALLY FROM OUR ASSUMPTIONS AND ANALYSIS. WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS LETTER. ANY SUCH INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. WE DO NOT RECOMMEND OR ADVISE, NOR DO WE INTEND TO RECOMMEND OR ADVISE, ANY PERSON TO PURCHASE OR SELL SECURITIES AND NO ONE SHOULD RELY ON THIS LETTER OR ANY ASPECT OF THIS LETTER TO PURCHASE OR SELL SECURITIES OR CONSIDER PURCHASING OR SELLING SECURITIES. ALTHOUGH WE STATE IN THIS LETTER WHAT WE BELIEVE SHOULD BE THE VALUE OF CSE GLOBAL LIMITED'S SECURITIES, THIS LETTER DOES NOT PURPORT TO BE, NOR SHOULD IT BE READ, AS AN EXPRESSION OF ANY OPINION OR PREDICTION AS TO THE PRICE AT WHICH CSE GLOBAL LIMITED's SECURITIES MAY TRADE AT ANY TIME. AS NOTED, THIS LETTER EXPRESSES OUR CURRENT VIEWS ON CSE GLOBAL LIMITED. IT ALSO DISCLOSES OUR CURRENT HOLDINGS OF CSE GLOBAL LIMITED SECURITIES. OUR VIEWS AND OUR HOLDINGS COULD CHANGE AT ANY TIME. WE MAY SELL ANY OR ALL OF OUR HOLDINGS OR INCREASE OUR HOLDINGS BY PURCHASING ADDITIONAL SECURITIES. WE MAY TAKE ANY OF THESE OR OTHER ACTIONS REGARDING CSE GLOBAL LIMITED WITHOUT UPDATING THIS LETTER OR PROVIDING ANY NOTICE WHATSOEVER OF ANY SUCH CHANGES. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING CSE GLOBAL LIMITED AND ITS PROSPECTS WITHOUT RELYING ON, OR EVEN CONSIDERING, ANY OF THE INFORMATION CONTAINED IN THIS LETTER.
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 they believe to be accurate and reliable. However, such information is presented "as is", without warranty of any kind – whether express or implied. The Authors make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and the Authors do not undertake to update or supplement this report or any information contained herein.
This document is for informational purposes only and it is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors' views as of this date, all of which are accordingly subject to change. The Authors' opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report's estimated fundamental value only represents a best effort estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor.
This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein or of any of the affiliates of the Authors. Also, this document does not in any way constitute an offer or solicitation of an offer to buy or sell any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction. To the best of the Authors' abilities and beliefs, all information contained herein is accurate and reliable. The Authors reserve the rights for their affiliates, officers, and employees to hold cash or derivative positions in any company discussed in this document at any time. As of the original publication date of this document, investors should assume that the Authors are long shares of CSE Global and have positions in financial derivatives that reference this security and stand to potentially realize gains in the event that the market valuation of the company's common equity is higher than prior to the original publication date. These affiliates, officers, and individuals shall have no obligation to inform any investor about their historical, current, and future trading activities. In addition, the Authors may benefit from any change in the valuation of any other companies, securities, or commodities discussed in this document. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of the Authors' operations and their affiliates. The compensation structure for the Authors' analysts is generally a derivative of their effectiveness in generating and communicating new investment ideas and the performance of recommended strategies for the Authors. This could represent a potential conflict of interest in the statements and opinions in the Authors' documents.
The information contained in this document may include, or incorporate by reference, forward- looking statements, which would include any statements that are not statements of historical fact. Any or all of the Authors' forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond the Authors' control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all securities, companies, and commodities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this letter are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. Forward-looking statements are not guarantees of future performance or activities and are subject to many risks and uncertainties. Due to such risks and uncertainties, actual events or results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Forward-looking statements can be identified by the use of the future tense or other forward-looking words such as "view," "believe," "convinced," "expect," "anticipate," "intend," "plan," "estimate," "should," "may," "will," "objective," "project," "forecast," "management believes," "continue," "strategy," "promising," "potential," "position" or the negative of those terms or other variations of them or by comparable terminology.
Important factors that could cause actual results to differ materially from the expectations set forth in this letter include, among other things, the factors identified in the risk sections in CSE GLOBAL LIMITED Annual Report for the year ended December 31st, 2016 and prospectus. Such forward-looking statements should therefore be constructed in light of such factors, and Quarz Capital Management is under no obligation, and expressly disclaims any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
