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Quarz Capital Management Open Letter To CSE Global FINAL 26th Feb 2018
Quarz Capital Management Open Letter To CSE Global FINAL 26th Feb 2018
Quarz Capital Management Open Letter To CSE Global FINAL 26th Feb 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 -
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)
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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:
Recommendation 1: Immediate distribution of S$18million (~10% dividend yield) of the S$48million4
of net cash. CSE will still retain more than S$30million to capitalize on attractive opportunities.
Substantial destruction of shareholder value has resulted in net cash balance falling from
~S$100million in 2015 to current levels.
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 CSE’s sizeable cash balance
Recommendation 3: Target Return on Equity of >10% (>S$17.3million of annual income). This can be
achieved by rightsizing CSE’s US business (profitable at oil price of >US$50/bbl), integrating subsidiaries
and new acquisitions, reducing corporate expenses and targeting future growth opportunities
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)
Recommendation 5: Increase in alignment of board, top management and shareholders’ interests.
This can be achieved by 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
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.
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
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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.
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.
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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 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.
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)
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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.
www.quarzcapital.com
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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.
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