CSE Global is proposing to undertake a renounceable non-underwritten rights issue. This means the rights can be traded or sold on the stock exchange.
CSE Global will issue 1 rights share for every 5 ordinary shares at $0.33, thus issuing 102.5 million shares to raise $33.8 million (net proceed of $33.4 million).
The company intends to utilise 90% of the proceeds or $30 million for potential acquisitions of synergistic businesses in New Zealand and the USA and retain the remaining 10% or $3.4 million to pare down debts.
The issue price of $0.33 for the rights is a 20.5% discount to the last transacted price of $0.415 and 17.7% discount to the theoretical ex-rights price (TERP) of $0.401.
Although the rights issue is not underwritten, to demonstrate their commitment and confidence, the Chairman and CEO have provided an undertaking to subscribe for their rights entitlements in full. This amounts to 0.63% and 2.57% of shares respectively.
Expected timeline of events
As the rights issue is within the general mandate previously sought by the company, there is no requirement to seek specific approval from shareholders for this rights issue.
- Ex-Rights Date: 23 Nov 2022
- Record Date: 24 Nov 2022
Full announcement here.
Why is CSE Global proposing a rights issue?
The Rights Issue has been proposed to raise funds:
- (a) for potential acquisitions of synergistic communications businesses in New Zealand and the USA; and
- (b) to partially repay some of the loans previously drawn down for certain business acquisitions.
The potential acquisitions form part of the Group’s strategy to expand and grow its Communications businesses in the infrastructure industry markets and participate in an expanding sector where demand for increased connectivity and security is expected to continue to grow.
Both the potential acquisitions relate to radio and critical communications business which the Company views as a natural complementary fit to its business.
It is envisaged that the potential acquisitions will strengthen the Company’s existing business partner and customer relationships as well as extend its geographic coverage into the New Zealand and USA markets for its Communications business, thereby enhancing its market position in these markets.
It is worth noting that at this current juncture, while targets have been identified, no definitive agreement has been entered into.
3 Key Insights to CSE Global‘s business model
1) Acquisitions is part of CSE Global’s genes
CSE Global has been an acquisitive company and this is not the company’s first rodeo. Although the company has not provided financial details as the potential acquisitions are not yet definitive, CSE Global, which started as a Singapore company does have a strong track record of making overseas acquisition.
The company’s goal is to become a global organisation with revenues mainly from overseas.
With large customers such as the independent oil majors like BP, Shell, Exxon and Chevron, as well as national oil corporations such as Indonesia’s Pertamina and Malaysia’s Petronas. On the infrastructure side, clients include government agencies, utilities, ports, railways and airports.
Hence, there are ample opportunities for integration and cross selling of new acquisitions.
2) CSE Global saw increasing revenue opportunities before deciding to acquire to expand
CSE Global currently provides communications and security solutions for Infrastructure and the Mining & Minerals sectors. From 2021, the company saw increasing demand for digitalisation and enhancements in physical and cyber security which has translated to a continuous, steady project pipeline in its Infrastructure segment.
CSE Global has previously communicated its intention to strengthen the radio communications business in Australia through strategic acquisitions, while also replicating the business model in the two-way radio communications industry in other regions outside Australia.
As the Infrastructure sector saw higher orders of radio communication equipment and solutions, mainly driven by utility and government customers in Australia, CSE Global must have saw a potential opportunity to grow its Oceania assets. Acquiring US assets is also likely to be complementary to its current offerings.
3) Acquisition in the form of diversification and building resilience
CSE currently generates about 40% of its revenue from Asia Pacific, 58% from Americas and the remaining 2% from Europe/Middle East. It derives more than 65% of revenues from the O&G segment, and 25% of its revenue from its infrastructure division.
This acquisition will increase revenue to its infrastructure division and with more than 90% of customers coming from the US, it will also provide some customer diversification.
Why this is the best time for CSE Global’s rights issue?
We think that the company has carried out the rights issue at an opportune time.
With borrowings at $101.4 million or 54% of equity, it has started to look unwieldy, especially in the current high interest environment. Should they have funded the potential acquisitions by debt, the debt to equity ratio would be nearly 70%.
If CSE utilised debt, at an interest rate of 4%, this would have cost $1.2 million which would have likely made any acquisition barely breaking even.
The equity fund raising would likely allow the company to take advantage of its relatively robust share price and make an accretive acquisition while keeping flexibility to carry out further acquisitions in the near term where potential opportunities may arise.
Dividends likely to be maintained
In addition, with the additional $3.4m of working capital, the company will be able to maintain the dividend for the increased number of shares. Currently, CSE Global pays about $7.7 million of dividends a year, a 20% increase to the number of shares would increase the dividends paid by $1.5 million.
Having said that, it is worth noting that the 1H22 earnings per share is only 0.88 cents, 55% lower than 1H21, due to cost pressures from supply chain disruptions and inflation. Dividends was at 2.8 cents on EPS ranging from 2.9c to 5.4c in the past 3 years.
If 2H22 does not perform, it is unlikely that CSE Global would maintain dividend payouts that is above 100% of payout ratio.
How can an investor take advantage of CSE Global’s rights issue?
After the announcement, CSE Global opened for trading at $0.365. This is 9% below the TERP of $0.401.
If an investor buys CSE Global at $0.365, the TERP price for the investor is $0.359. Hence for investors acquiring at this price, the effective dividend yield would be 7.78%.
Investors can also attempt to buy the rights upon commencement of trading and exercise the rights at an issue price of $0.33.
In summary…
CSE Global is carrying out yet another synergistic acquisition and is astutely structuring its acquisition with a timely rights issue. The company usually carries out two and three acquisitions each year depending on availability of targets and the target business usually needs to be earnings-accretive and generate good cashflows.
An acquisition in the radio and critical communications space in New Zealand and US will allow the company to diversify its offerings both on a segmental and geographical basis and also seize the opportunity to secure more projects. Expanding into the radio and critical communications space is also complementary to both its Oil & Gas and infrastructure segments.
With the rights issue, the company has the cash to maintain its dividend. This is of course highly dependent on its 2H22 performance seeing a recovery, underpinned an earnings accretive acquisition.
Investors can also take advantage of the rights issue to add onto the stock at lower prices and with dividends being maintained, this would provide yields of nearly 8%, which is a sizeable return even in the current interest environment.
