CWT Ltd

Kim Eng on 12 Jul 2012

SGD100m net profit excluding divestments. With its commodity trading business gathering steam, we now believe net profit may well break through the SGD100m mark this year. This is excluding a  SGD22.5m gain from the sale-leaseback of Pandan Logistics Hub which was recently completed. This will mark a breakthrough year for CWT.

Driven by commodity trading contribution. This paradigm shift in profitability is largely driven by new commodity trading arm – MRI, which we estimate will contribute in excess of SGD50m this year, in its first full year of consolidation. As part of the original purchase agreement, CWT’s effective interest recently increased to 82%. Through further share buy-backs over the next three years, MRI will eventually be 100% owned.

Recent announcements are a sign of its bigger ambition. The company made several low-key announcements related to its commodity trading business recently, incorporating several new companies in Uruguay, Argentina, Switzerland and China. These companies will be used to 1) Expand the product scope beyond base metal into other metals 2) Secure more of the trading supply chain by providing logistics service, extracting value and reducing risk. These will not contribute immediately, but represent the next leg of growth.

Ramp-up warehouse in demand. Our channel checks suggest that ramp-up warehouses in Singapore continue to be in high demand from MNCs, with CWT-operated warehouses at full occupancy. We would like to highlight that demand tend to be anti-cyclical, as inventory moves at a slower pace during periods of weak demand. With a SGD500m MTN program recently established, we expect asset-recycling to continue. CWT has booked-in “one-off” divestment gains for 6 of the last 7 years.

Maintain BUY. In the current risk environment, we find even more favor in CWT’s structural growth story, which is not macro/ volume-driven, but rather a deployment of latent capital into new businesses. We believe consensus estimates do not fully-reflect earnings potential of MRI but will have to adjust following 2Q12 results. We see multi-year growth potential and urge investors to get on the gravy-train. Maintain BUY with a SOTP TP of SGD1.90, adjusted for asset values and earnings.