Thursday, 27 March 2014


OCBC on 27 Mar 2014

We met up with CWT’s management recently to better understand their growth drivers and risk management. We think CWT’s commodity trading business is not well-understood and being unfairly penalised by the market for misperceived risks. We understand from management that they do not take open positions on commodity prices while counterparties are mainly state-owned companies and MNCs, thus reducing market and counterparty risks. We also expect FY14 commodity trading core earnings to come in higher (+%64) as energy products make a full-year contribution. In addition, CWT’s logistics business will be boosted by three warehouses that has/will receive TOPs in 2014, increasing total GFA by 38% to 7.2m sq ft. We expect core earnings in Logistics business to increase with CAGR of 16% between FY14-FY15. Maintain BUY with a higher fair value estimate of S$1.87 (previous S$1.68).

Rising fair value estimate to S$1.87
We maintain our BUY but derive a new fair value estimate of S$1.87 (previous S$1.68) via SOTP. The counter is trading at 6.4x FY14F PER, representing a steep discount to its peer Kerry Logistics Network (x19.1 PER). We think this is due to over-estimation of risks in Commodity SCM and lack of clarity on earnings growth ahead. Furthermore, we believe our valuation is conservative on the following counts: 1) each business segment uses a below-average PER, 2) value of warehouse portfolio derived excludes overseas warehouses, and 3) assumed psf price is at 10% discount to similar warehouses.

Misperceived risks about Commodity SCM
We understand from management meeting that CWT fully hedges prices in its Commodity SCM business, rendering the trades back-to-back and eliminating risk of losses through adverse price movements. As CWT makes a fixed premium on a per-weight trading basis, its results are not likely to be correlated to commodity price movements. In addition, we think the sub-1% profit margin is not a concern as the returns are magnified through leverage (10.3x in FY13), yielding a reasonable 7.3% ROE. Nevertheless, volatility in earnings is likely to come from energy products which are opportunistic in nature as compared to non-ferrous which is more towards long-term contracts. In terms of counterparty risk, we think it is reduced, though not eliminated, through dealing with mainly state-owned companies and MNCs. Overall, we think Commodity SCM business is less risky than perceived while we expect FY14 core earnings to come in higher (+%64 to S$34m) as energy products make a full-year contribution. Our estimation is well within management’s guidance that normalised earnings are between S$20m to S$50m.

New and redeveloped warehouses drive to Logistics business’ growth
Three redeveloped/new warehouses will receive TOP in FY14. Collectively, the trio will increase CWT’s portfolio’s total GFA by 38% to 7.2m sq ft, which we estimate to deliver a substantial 16% CAGR in Logistics’ core earnings over FY14-FY15.

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