CWT Ltd

Kim Eng on 8 Aug 2012

Ahead of consensus. 2QFY12 net profit of SGD19.3m was marginally below our expectations but still significantly above consensus. With recurring net profit of SGD44.1m for the first-half, CWT remains well ontrack to meet our lofty expectations of profit doubling to SGD100m this year. We now expect consensus to adjust earnings upward to account for continued traction of CWT’s commodity trading business.

Lower than last quarter’s run-rate. Yoy comparison is not meaningful given that there was no commodity trading contribution last year. On a qoq basis, recurring net profit of SGD19.3m was below last quarter’s run-rate of SGD24.8m. This was partly due to start-up costs to put in place an Asian office to expand the commodity trading business, which we earlier alluded to in our 12 July report “The 100 million Dollar Question”. Admin costs were up SGD3.7m on a qoq basis.

Commodity trading volume up. Despite concerns about a slow-down in China, we understand volume was actually higher than last quarter. Profit came in lower due to slightly lower margins but this is part and parcel of the business, sometimes also arising from timing of accounting cost and contract recognition. More importantly, the team expects to sustain this performance into the rest of the year, which implies a net profit contribution of around SGD45m.

Warehouse gains will continue to be a feature. A $22.5m gain for sale-leaseback of 49 Pandan Road will be recognized in the next quarter, while development of the 725,000 sqf Cold Hub 2 remains on track for completion by the middle of next year. Singapore warehouse space, in particular ramp-up ones, is expected to remain in great demand. CWT’s existing landbank should be supportive of further development gains for the next five years.

Deeply undervalued; Reiterate BUY. While the balance sheet appears heavily-geared (net debt/ equity of 71%), we differ from this consensus view. Company presentation now clearly shows most of the debt relates to trade financing for the commodity trading business. To be clear, these debt are 1) secured against each individual trade with no other recourse 2) at the MRI level with no recourse to parent CWT. We estimate net debt excluding this is negligible at less than SGD50m. We see very limited downside to the stock but significant growth potential. Reiterate BUY with a SOTP TP of $1.90.