CWT Limited - CIMB Research 2015-11-06: Better risk-reward on potential buyout

CWT LIMITED C14.SI

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.

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 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 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.

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.

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.

Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2015-11-06

CIMB Securities SGX Stock Analyst Report HOLD Upgrade REDUCE 1.98 Up 1.76