Logistics to overcome margin pressure from trading
CWT’s trading segment has recently become barely profitable due to thinning margins from an already low base. However, we believe the earnings growth in the core logistics business has the potential to override the negatives from trading in FY14.
CWT‟s share price has de-rated significantly since the announcement of poor 3Q results and provides ample upside. We change our rating from Outperform to Add following a change in our recommendation structure. Our target price remains unchanged at S$1.49, based on 9.1x CY15 P/E (historical mean). Catalysts are recovery in commodities logistics and new warehouse additions in FY14-15.
Trading will continue to drag earnings
CWT‟s commodity SCM segment, which is involved in trading activities, has turned barely profitable in recent quarters due to 1) thinning margins as a result of the low trading volatility and 2) rising finance costs to fund the bigger trade volumes as CWT builds up its naphtha portfolio. We believe this margin pressure will persist in the coming quarters due to poor demand for copper concentrates in China which has pushed the gross margin down from a comfortable level of c.3% to c.1%.
Banking on core logistics to deliver in FY14
On the logistics front, we see earnings growth in FY14 from 1) 1.3m sq ft of logistics warehouse additions in Singapore and 2) recovery in soft commodities logistics. Barring any unforeseen delays in the opening of the new warehouses, we believe CWT‟s core logistics operations will deliver strong earnings growth in FY14 and contribute to the bulk of the net profit, especially given the short-term weakness in trading.
Recent share price weakness a buying opportunity
CWT‟s share price has de-rated significantly following the announcement of poor 3Q results, and we believe the stock has been oversold on concerns over the trading business. The stock is currently trading at 8.4x CY15 P/E, 0.5 s.d. below its historical mean. We advise investors to take this opportunity to accumulate the stock as we see value in the core logistics business.
Publish date: 29/11/13