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.
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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