CWT’s core logistics business has hit a soft patch due to disappointments in the commodities logistics segment. The commodity SCM business, while facing new growth prospects from naphtha, is expected to report flat yoy profits due to one-time restructuring costs.
With a weak outlook for both the core logistics operations and commodity SCM, we downgrade our Outperform call to Neutral. We cut FY13-14 EPS estimates by 9-14% and our SOP-based target price falls to S$1.81. A short-term de-rating catalyst is the announcement of 2Q results in August, where the drag of labour cost restructuring will show up as a one-off and slower commodity SCM growth will start to feature.
Why logistics could stutter
The core logistics operations have suffered due to
1) poor harvests of soft commodities, affecting the commodity logistics segment,
2) weak demand for hard commodities, hitting the LME metals business, and
3) competition in the collateral management business from local Chinese collateral managers.
On the upside, demand from chemicals and capacity additions are expected to counter the impact, although these will only kick in from FY14 onwards.
In 4Q12, CWT added naphtha to its trading portfolio, which contributed approximately 25% to total commodity SCM revenues. Management sees growth potential in naphtha and is looking to balance the trading portfolio by increasing naphtha’s share of segmental revenues to 40-50%. Meanwhile, growth for bread-and-butter copper concentrates was marginal and growth potential looks muted. Coal trading is no longer a viable model due to strict trade restrictions in China and Indonesia.
We adjust our forecasts to reflect
1) slower growth in copper concentrates,
2) addition of naphtha to the trading portfolio,
3) smaller contributions from coal trading,
4) one-time restructuring cost of S$5m in FY13,
5) poor commodity logistics performance, and
6) contract logistics warehouse additions in FY14-15.
The result is a fall in FY13-14 EPS estimates by 9-14% and in our SOP-based target price to S$1.81. This implies a P/E of 10.7x, which we believe is not excessive as stability in commodity SCM earnings will warrant higher P/E multiples. (Read Report)
Source : CIMB Research