CWT

Kim Eng on 24 Feb 2012

Above expectations. CWT’s FY11 results were stellar and above expectations, affirming our Buy recommendation and investment thesis. With contributions from its newly-acquired commodity trading arm MRI kicking in, recurring net profit went beyond the $50m level for the first time in its history, after hovering around $25-30m for the past four years. We believe that this heralds a new era of sustainable profit for CWT. Maintain Buy.

Driven by six-month contribution from MRI. Recurring net profit grew 68% YoY from $29.9m to $50.2m in 2011, driven by a half-year contribution from MRI, which we estimate to be about $15m. While there was also structural growth in its other businesses, profits were dragged down by business development costs during the year, as the group embarked on new business ventures, such as coal trading, to put its war chest to good use after the CACHE REIT spin-off.

Strong operational growth as well. The inclusion of MRI, as well as coal and other commodity trading businesses, in FY11 means that revenue comparison on a YoY basis is not meaningful. Excluding MRI, 4Q11 operating performance was strong, with warehouse occupancy at an all-time high and contribution from the Pandan Logistics Hub, which was commissioned in 3Q11. Construction of the $135m warehouse for AIMS REIT was also started, which boosted profitability.

Look past the headline debt number. While CWT appears to have plunged itself into a net debt position ($181m, 38% net gearing) from its previous balance sheet strength, it is worth noting that these debts are mostly at the MRI subsidiary level with no recourse to the group. The nature of commodity trading is such that gearing is required to fund the substantial working capital, especially if it is a growing business. We believe the level of profitability justifies the taking on of debt.

Maintain Buy. Management announced a full-year dividend of 2.5 cents per share. Our SOTP-based target price is $1.68. A full-year contribution from MRI, as well as the realisation of business synergies in 2012, should bring profitability even higher. Other catalysts include possible warehouse divestment gains in 2012, as well headway in expanding its logistics business presence in Europe.