CWT Ltd - OCBC Investment 2016-11-03: Core 9M16 PATMI below our expectations

SGinvestors.io

CWT LIMITED C14.SI

CWT Ltd - Core 9M16 PATMI below our expectations

• 9M16 core met 70% of our forecast.
• Logistics business growing steadily.
• Maintain HOLD.

Continued weakness in commodity trading volume 

• CWT Limited’s (CWT) 3Q16 revenue decreased 11.4% YoY to S$2.34b, mainly due to lower commodity trading volume notably in naphtha and a general drop in commodity prices amid a downturn in commodity sector. 
• Despite lower revenue, gross profit came in flat at S$93.7m due to unrealized mark-to-market (MTM) accounting gains of S$9.7m in 3Q16 arising from its commodity marketing (CM) segment.
• However, 3Q16 administrative expenses rose 11.0% YoY to S$51.2m due to expansion of brokerage business and provision made in anticipation of expenses relating to the on-going corporate transaction. Consequently, 3Q16 PATMI declined 16.9% YoY to S$22.6m. 
• For 9M16, revenue fell 13.6% YoY on similar reasons as 3Q16 while gross profit declined 3.3% to S$244.4m due to unrealized MTM losses instead of gains recognized over the nine-month period.
• Stripping out MTM accounting effects and other one-off items, CWT’s 9M16 core PATMI came in below our expectations as it fell 17.9% YoY to S$71.6m, and formed 70% of our FY16 forecast.

Improvement in logistics GPM 

• Looking ahead, we expect commodity marketing to remain weak, with volatile commodity prices likely to lead to more unrealized MTM impact.
• However, we expect the heavyweight contributor, CWT’s logistics business, to provide the stability, partially offsetting weakness from CM segment.
• Over the last three quarters, CWT’s logistics’ gross margin has steadily improved from 15.7% in 1Q16 to 16.5% in 3Q16, along with steady QoQ revenue growth. And with the mega logistics hub still on track to complete by 1H17, we expect meaningful contribution from FY18 onwards. 
• In addition, we also expect the better showing from CWT’s financial services segment seen in 3Q16 to continue, especially as CWT expands its brokerage business.

Slightly lower FV of S$1.90 

• With 9M16 below expectations, and on uncertain CM business outlook, we cut our FY16/17F core PATMI by 9.7%/2.1%. 
• Based on blended FY16/17F core PATMI (SOTP method), our FV decreases from S$1.93 to S$1.90. 
• Maintain HOLD.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-11-03

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.90 Down 1.930