Weak momentum
- CWT’s 1H15 core net profit of S$52.7m was below expectations at 44% of our and consensus full-year forecasts due to lower commodity logistics volumes and higher start-up costs associated with the new integrated logistics hub.
- We cut our FY15-17 EPS by 2-8% and our SOP-based target price falls slightly to S$1.76.
- The only bright spot was the surprise interim DPS of 3 Scts.
- While CWT has confirmed that its controlling shareholders are potentially exploring the sale of their stake in the company, we believe this may take time to unfold, especially amid poorer underlying business momentum in the logistics segment.
- As CWT’s share price has seen a good run on expectations of a potential buyout, we believe there may be near-term downward pressure on the share price if such an event is delayed, hence our downgrade from Hold to Reduce.
Logistics disappointed on lower volume and start-up costs
- CWT’s 2Q15 gross profit fell by 16% yoy, which was mainly attributed to the logistics segment (-26% yoy). This resulted from:
- lower commodity logistics volumes, with revenue falling 23% yoy and
- start-up costs associated with the construction of the new mega integrated logistics hub, which is targeted for completion in 1H17.
- As a result, logistics gross margin fell to 14.0% (2Q14: 18.7%).
- Financial services also disappointed, as gross profit halved yoy in 2Q15 due to the slowdown in trade services.
- The commodity marketing segment was stable, with gross profit flat yoy as volume growth tapered off.
- All around, the business momentum appears to be slowing, with few near-term catalysts.
Potential buyout, but it may take time to materialise
- CWT has announced that its controlling shareholder, C&P Holdings, is potentially exploring the sale of its stake in CWT, though it has not begun any formal process nor is it engaged in exclusive negotiations with potential buyers.
- According to Bloomberg, C&P Holdings, the Loi family and other directors of C&P Holdings have a combined 62.1% stake in CWT.
- CWT’s share price has run up 46% since Mar, which means the market has already priced in a buyout scenario. However, we believe that such a process could take some time to materialise.
- Furthermore, the underlying momentum of the core logistics segment appears weak, and the logistics business would fetch a higher valuation based on FY17 earnings and beyond when the new 2.2m sq. ft. mega integrated logistics hub starts contributing to earnings (26% capacity growth in contract logistics warehouse space).
- As such, a stake sale may prove to be more attractive further down the road.
Analyst: Jessalynn CHEN
Source: http://research.itradecimb.com/
