CWT Limited - Better risk-reward on potential buyout


■ 3Q15 core EPS was slightly above. 9M formed 80%/79% of our/consensus FY15.

■ 3Q15’s earnings were propped up by higher contributions in the financial services segment, as demand for trade services grew due to interest rate arbitrage.

We think CWT could be worth S$2.54/share in a buyout, though it could take time to materialise. That said, the risk-reward profile has improved, with narrower downside.

Upgrade to Hold, with a higher SOP-based target price of S$1.98 as we roll forward to FY17 and remove the 10% holding co. discount, in view of a possible buyout.

Core net profit up 3% yoy on better financial services
CWT reported a 3Q15 core net profit of S$33.1m (+27% qoq, +3% yoy), lifted by higher gross profit from financial services (S$23.2m, +234% qoq, +108% yoy). Management explained that demand for trade services surged in 3Q as the PBOC rate cuts led to an interest rate arbitrage opportunity. We think the chance of a repeated performance is unlikely as the onshore-offshore interest rate gap in China has narrowed. We revise our FY15-17F EPS by 2-4% on better financial services, offset by higher expenses.

Logistics remains soft; Tianjin warehouse wiped out in the blasts
Logistics revenue fell 2% qoq, but gross profit rose 4% qoq to S$31.8m, bringing gross margin up to 14.8% (2Q15: 14.0%). This was led by better freight margins as CWT took the opportunity to defer buying rates as freight rates fell. Commodity logistics continues to remain soft. CWT also recognised an S$6.3m impairment charge (net of insurance claims) as its warehouse and container yard in Tianjin was wiped out in the blasts; if the land is found to be contaminated, they are unlikely to rebuild on the site.

Commodity marketing: higher volume of copper concentrates
Commodity marketing revenue fell 5% qoq and 52% yoy due to the impact of lower commodity prices. Gross profit, which is a better measure of traded volumes, grew 24% qoq and 7% yoy to S$34.9m (excluding trade finance income and expenses). The improvement was driven by a higher volume of copper concentrates traded, though this was partially offset by a lower volume of energy products, including naphtha.

Could be worth S$2.54 in a buyout scenario, but will still take time
CWT’s share price continues to be propped up by hopes of a buyout. Based on previous logistics M&A transactions, we estimate that the average buyout multiple was 22.4x historical P/E. Applying this figure to CWT’s estimated FY14 logistics net profit, CWT’s shares could be worth up to S$2.54 apiece (implies 20x FY17 logistics P/E), assuming no value is ascribed to the non-core businesses. We continue to believe a buyout may take time to materialise, as CWT has not announced the start of any formal processes.

Technical Analysis
Daily Chart
Upgrade to Hold on better risk-reward profile
We upgrade to Hold from Reduce, with a higher SOP-based target price of S$1.98 after rolling forward to FY17 and removing the 10% holding company discount, in view of a possible buyout. CWT’s share price has also fallen 13% since Aug, which improves the risk-reward profile. We see a potential 30% upside vs. 9% downside from the current share price in a buyout vs. no buyout scenario. (Read Report)

Read Related Report
1) CWT Ltd - Impairment losses weigh on 3Q15 earnings‏ by OCBC Investment Research, published on 6 November 2015

Source : CIMB Research

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