CWT Limited
COMPANY UPDATE
CWT Limited
OUTPERFORM
Maintained
S$1.07
@05/09/11
Original earnings base resilient
SINGAPORE
6 September 2011
Target: S$1.27 Logistics
CWT SP / CWTD.SI
Kenneth Ng CFA +65 6210 8610 – [email protected]/ Daniel Lau +65 6210 8614 – [email protected]
• Earnings resilience and strong financials. We lower our FY11-13 earnings by 725% to incorporate lower base-metal trading assumptions in view of slower global economic growth. This lowers our SOP-based target price to S$1.27 (from S$1.74). Re-rating catalysts are expected from higher margins and larger commodity trading contracts secured. CWT is trading at 9.8x CY13 EPS, below its 4-year forward mean of 14x. Even incorporating a 30% probability of recession (CIMB estimate), CWT should trade at least at 12x, in our reckoning. • Resilient base. We believe CWT’s original revenue streams will be resilient in a downturn. CWT’s contract-logistics and freight-forwarding operations should be supported by thicker margins and stronger demand for less-than-container-load shipments. Stronger coffee and cocoa harvests and new contributions from tobacco should also boost its soft commodity business in Europe. CWT is, moreover, moving up the learning curve in thermal coal trading, which is gaining traction. • Uncertainties from new venture. The only earnings risk we envision comes from its newly acquired base metal trading. CWT’s base metal trading volumes could dry up and margins could be squeezed as metal stockpiles increase. We have cut our earnings estimates by 20-33%, to account for a potential downturn. • Strong financials. CWT is well-positioned to weather a potential downturn, with a low net gearing of 0.4x. It can also fall back on its warehouses to fund upcoming capex requirements. Financial summary FYE Dec Revenue (S$ m) EBITDA (S$ m) EBITDA margins (%) Pretax profit (S$ m) Net profit (S$ m) EPS (S cts) EPS growth (%) P/E (x) Core EPS (S cts) Core EPS growth (%) Core P/E (x) Gross DPS (S cts) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) Net cash per share (S$) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x)
2009 623.9 60.9 9.8% 42.4 33.9 5.9 (54.1%) 18.0 5.9 54.0% 18.0 2.0 1.9% 2.1 11.6% 28.5% N/A 23.9 11.8
2010 747.2 23.8 3.2% 189.4 179.0 30.4 414.2% 3.5 5.0 (15.9%) 21.4 8.5 8.0% 1.5 41.9% N/A 0.31 3.8 19.4
2011F 1,880.2 90.9 4.8% 61.5 50.0 8.4 (72.4%) 12.7 7.5 51.4% 14.1 2.0 1.9% 1.4 10.7% 28.4% N/A 24.1 8.8 -7.2% 0.95
2012F 2,296.6 106.2 4.6% 73.3 58.6 9.8 16.2% 10.9 9.8 29.6% 10.9 2.0 1.9% 1.2 11.4% 24.1% N/A 10.8 7.6 -19.7% 0.95
2013F 2,602.1 117.5 4.5% 82.6 66.1 11.0 12.9% 9.7 11.0 12.9% 9.7 2.0 1.9% 1.1 11.6% 14.9% N/A 27.2 6.5 -24.8% 0.87
Source: Company, CIMB Research, Bloomberg
Price chart
Market capitalisation & share price info
1.5
2.00
1.4 1.3
1.50
1.2
1.00
1.1 1.0
0.50 0.9 0.8 S e p-10
0.00 Fe b-11 Volume 10m (R.H.S c a le )
Source: Bloomberg
J ul-11 CWT Limite d
Market cap 12-mth price range 3-mth avg daily volume # of shares (m) Est. free float (%) Conv. secs (m) Conv. price ( )
S$639m/US$529m S$1.39/S$0.91 1.8m 600 100.0
Share price perf. (%) 1M 3M 12M (6.9) (9.4) 26.7 Relative (13.8) (19.3) 17.0 Absolute % held Major shareholders 57.3 C&P Holdings and Senior Management 4.7 Morgan Stanley 2.7 EDB Investment
Source: Company, CIMB Research, Bloomberg
Please read carefully the important disclosures at the end of this publication.
Earnings resilience “Sticky” warehousing demand, stronger margins. Warehousing, or contract logistics, contributed 24% to CWT’s FY10 revenue. CWT also provides third-party logistics services to its tenants. Such services include chemical blending, packaging, handling and point-to-point transportation. Revenue from such services usually makes up the bulk of contract logistics revenue, though margins tend to be lower than pure warehousing rental, as CWT almost does not incur any operating expenses on space rental. During a downturn, clients move fewer goods out of CWT’s warehouses, which reduces its third-party logistics revenue but increases its rental income. Consequently, contract logistics margins improve, protecting the bottom line. Figure 1: CWT’s core earnings are resilient, even during a downturn Stable earnings through downturns
Core margins on a general uptrend
PBT adj for other inc & ex p*
Gross margins
In S$m 36.0
40 30
26.0
26.7
2007
2008
39.6
9.6 10
4.7
2.9
2003
2004
2005
2006
2009
PBT margins
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
16.6
20
Operating margins
2010
2003
2004
2005
2006
2007
2008
2009
2010
Source: Company, CIMB Research * In calculating CWT’s adjusted core PBT and margins, we have stripped out other income and other expenses.
Increasing warehouse capacity; higher average rents. CWT also enjoys earnings support as new warehousing capacity comes on stream. In a downturn, leasing risks are mitigated as CWT only begins construction on sufficient demand. Prior to completion, the bulk of its new warehousing space would have been filled up. In addition, as CWT adds new warehouses, average monthly psf rentals would be lifted, as new and more modern facilities command higher rents. From 2011 to 2013, it has a strong warehousing expansion pipeline. The group recently completed the construction of CWT Hub 3, a 830k sf facility which will add 330k sf of capacity once completed in 4Q11. CWT is also looking to commence the construction of a 725k sf CWT Cold Hub 2, which is expected to be completed by 3Q12. Figure 2: Contract logistics contributions should continue to grow Estimated warehouse space and average monthly rents Warehouse spaces
12.0 8.0
0.95 0.60
0.65
0.68
0.75
2.0
4.0
5.0
6.2
7.2
0.99
1.05
0.80
6.0 4.0
8.5
In S$
250
1.20
200
1.00
9.3
9.6
10.0
2006 2007 2008
Third party logistics
Estimated av erage monthly rent (RHS)
In m sf
10.0
Estimated contract logistics revenue^
0.80
150
0.60
100
0.40 0.20
50
0.00
0
2009 2010 2011F 2012F 2013F
39 29
40
52
131
115
102
2007
2008
2009
68 2006
Warehousing rev enues
56
72
82
92
126
125
115
120
2010
2011F 2012F 2013F
Source: Company, CIMB Research estimates ^Historical warehousing and third party logistics revenues are based on CIMB Research estimates as CWT does not publish such numbers
Freight-forwarding volumes could be supported; margins could improve too. While a downturn will lower trading volumes, it could increase the demand for less-thancontainer-load shipments. With lower demand for goods, producers will not be able to export sufficient volumes to fill up whole containers. To export economically, they will have to ship their goods out in less-than-container loads, potentially supporting CWT’s [ 2 ]
freight-forwarding volumes. In addition, declining freight rates in a downturn could boost CWT’s freight-forwarding margins. In freight forwarding, CWT enters into contracts with its clients first, before booking container space. Declining freight rates will be beneficial to CWT, as CWT will be able to widen its freight-forwarding spreads. Soft commodities less affected by downturns. CWT’s increasing exposure to soft commodities should also improve its earnings stability in a downturn. Its soft commodity logistics business in Europe largely depends on the production volume of cocoa, coffee and tobacco, which is more affected by weather conditions than economic conditions, as demand for coffee and cocoa tends to be rather resilient. CWT’s 1H11 commodity logistics earnings had improved significantly yoy, boosted by strong commodity logistics volume as well as maiden contributions from its South African subsidiary, Aquarius Shipping International, a tobacco freight forwarder. Going forward, we believe CWT’s commodity logistics operations will be supported by strong coffee and cocoa production as well as maiden contributions from tobacco. Figure 3: Commodity logistics earnings tend to be stable Commodity logistics revenue had picked up in 1H11
Estimated commodity logistics revenue In S$m 190
Commodities logistics rev enues
In S$m 60
58
170
55 50 45 40
Commodities logistics rev enues
34
32
34
32
27
30
70
61
50
2Q11*
1Q11*
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
2012F
90
25 1Q09
2011F
110
34
31
168
120
130
35 30
156
137
150 37
152
2008
2009
2010
2013F
Source: Company, CIMB Research estimates * 1Q11 and 2Q11 commodities logistics revenues are different from reported numbers as we have stripped out estimated coal logistics contributions..
Earnings downside limited Fluctuations in thermal coal trading; but contributions are too small. 2Q11 margins fell due to losses on several thermal coal shipments to China. We believe this was due to ineffective pricing, with gross spreads insufficient to cover transportation and freight-forwarding costs. Going forward, we believe management would have moved up the learning curve, minimising such loss-making shipments. In addition, coal trading has yet to make significant contributions. In 1H11, coal trading contributed 8% to CWT’s revenue and we believe contributions to the bottom line would have been less, due to thin margins. Therefore, fluctuations in coal trading earnings should have a minimal impact on CWT’s bottom line. Volatility in base metal trading… Following the consolidation of MRI, base metal trading will be CWT’s largest earnings contributor. MRI’s trading volume depends on the demand for base metals (copper, zinc, lead) which are often used in manufacturing and construction. As trading volumes could dry up in an economic downturn, we have lowered our base metal trading volume assumptions and slashed our FY11-13 base metal trading contributions by 20-33%. This constitutes the major part of our earnings downgrade.
[ 3 ]
Figure 4: Base metal trading volume and revenue assumption revision Copper Volumes ('000 metric tonnes) FY11 FY12 FY13
Previous 570 1,344 1,111
Current 412 867 913
% ch ange -28% -35% -18%
Lead Volumes ('000 metric tonnes) FY11 FY12 FY13
Previous 133 378 444
Current 126 273 312
% ch ange -6% -28% -30%
Volumes ('000 metric tonnes) FY11 FY12 FY13
Previous 77 200 200
Current 43 97 110
% ch ange -45% -51% -45%
Overall revenues (S$ mn) FY11 FY12 FY13
Previous 1,400 2,200 2,200
Current 1,044 1,473 1,741
% ch ange -25% -33% -21%
Zinc
Source: CIMB Research estimates
…but maiden contributions from MRI. We expect MRI to contribute to CWT’s bottom line, even in a downturn. In base metal trading, traders attempt to make spreads by flipping metal concentrate contracts between producers and smelters. Base metal concentrate contracts are quoted based on prices excluding Treatment Charges and Refining Charges, which are costs incurred to prepare metal concentrates for production into metal products. Margins could be squeezed by fluctuations in treatment and refining charges. Volatility could be induced by lower global refining capacity. Sufficient metal stockpiles could also bestow stronger bargaining power on smelters and refiners. We believe investors will be concerned about potential losses by MRI. However, we believe the possibility is small. According to management, MRI has a robust risk management control system, which is essential to limiting losses. In addition, CWT has hired a base metal trading veteran, Mr Mark Loewe, as CEO of its base metal trading operations. Lastly, CWT has retained MRI’s experienced traders. We believe the above will limit any earnings downside. Figure 5: Though we lower our earnings expectations, we believe MRI will contribute to the bottom line Historical and estimated trading volume In 000 mt
Copper
2,000 120 1,500
67 357
480
Lead
1,007
950
8% 75 250
85 251
97 273
110 312
6% 3.5%
824
867
913
2%
-
0% 2006
2007
2008
2009
7.7% 6.7%
2010 2011F 2012F 2013F
4.3%
3.3%
[ 4 ]
Zinc
7.6%
4.7%
4.3%
3.7%
2007
2008
5.0%
5.1%
5.3%
5.5%
2.1%
2.1%
2.3%
2.5%
1.8%
2.0%
2.2%
2.4%
2010
2011F 2012F 2013F
3.7%
1.9% 2006
Source: Bloomberg, MRI fact sheet, CIMB Research estimates * Historical market share based on CIMB Research estimates
Lead
6.1%
4%
1,200 800
Copper
10%
500
550
1,200
In 000
Zinc
140 140
1,000 500
Estimated market share*
2009
Figure 6: Estimated base metal trading revenue contributions* Copper
In S$bn 3.0 2.5
0.00 0.04
2.0
0.02 0.07
1.5 1.0
2.0
Zinc
0.04 0.12
2.3
Lead
2.0
0.5
0.11
0.02 0.06
1.5
1.5
2009
2010
0.04
0.02 0.06
0.03 0.07
0.02 0.06
2.0
1.6
1.4
0.0 2006
2007
2008
2011F
2012F
2013F
Source: Bloomberg, CIMB Research estimates * Historical revenues based on CIMB Research estimates
Healthy balance sheet Low gearing; strong cash flows and ample financing lines. Net gearing is low, at 0.4x. In addition, cash flows from CWT’s core logistics operations are S$20m-S$30m annually. Lastly, CWT has a stable of warehouses available for monetisation to shore up its balance sheet or fund future capex requirements. Monetisation of warehouses as early as next year? In our estimation, CWT will require S$130m-170m over the next three years for the following capex: i)
S$40m-50m for the construction of CWT Cold Hub 2.
ii)
S$80m-90m for the construction of a 1.2m sf warehouse for AIMS REIT, based on a construct-and-leaseback contract.
iii)
S$10m-15m for the construction of simple base metal concentrate blending facilities in South America.
iv)
S$1m-5m for the construction of thermal coal blending facilities in Indonesia.
v)
S$5m-10m for the construction of a transport hub in Singapore, a multimodal hub for loaded containers and chassis parking.
Management sees existing low interest rate environment as an opportune time to increase leverage and raise profitability. However, management does not rule out the possibility of divesting another asset to fund its capex requirements, depending on funds availability. In addition, any economic downturn and liquidity crunch could cause CWT to turn prudent by not increasing leverage but to resort to warehouse divestments for funding capex instead, in our view. Figure 7: Potential warehouses for sale No. 1 2 3 4 5 6 7 8
Facilities CWT Logistics Hub 1 @ Tanjong Penjuru Distripark @ Pioneer Sector 1&2 Distripark @ Toh Guan Road East Distripark @ 7 Kwong Ming Road CWT Distripark@ 47/47A Jalan Buroh Pandan Logistics Hub CWT Hub 3 Cold Hub 2 Total
Sq ft (GFA) 375,233 118,080 114,882 47,086 739,243 323,066 834,430 725,000 3,279,524
Selected properties covered by ROFR to Cache Logistics T rust No. 1 2 3 4
Facilities Pandan Logistics Hub CWT Hub 3 Cold Hub 2 CWT Logistics Hub 1
Sq ft (GFA) 323,066 834,430 725,000 375,233
Source: Company, Cache Logistics Trust 2Q11 results presentation, CIMB Research
[ 5 ]
Stake 100% 100% 100% 100% 100% 100% 100% 100%
Comments
Ready by 4Q11 Ready by 2Q11 Ready by 3Q12
Valuation and recommendation Maintain Outperform. While we have cut our earnings estimates by 7-25%, we believe CWT’s earnings growth in the next few years could still be supported by stronger margins, continued warehouse-capacity expansion and a diversified business. Lowering SOP target price to S$1.27 (from S$1.74). Following our earnings downgrade, our SOP valuation drops to S$1.27. We are now ascribing 12x P/E to CWT’s logistics operations (formerly 15x), on an amalgamation of a base-case 15x target and a 30% chance of trough valuations of 4x. For its coal and base metal trading operations, we have lowered our P/E from 7x to 5x, at a discount to Glencore’s existing 6x valuation. Lastly, we have also extended our investment horizon to 2013 and take the opportunity to roll over our earnings multiples to CY13. Figure 8: SOP valuation Investments
Price (S$) 0.98 0.485 0.205
Cache Logistics Trust Cambridge REITs AA REIT Total fin ancial assets
Core operations MRI (base metal trading) Coal trading Logistics Core operations value (S$ m)
Target price ( S$) 1.15 -
No. of shares (m) 635.9 1189.2 2207.1
CY13 PATMI (S$m) 15.5 6.0 44.5
Target P/E (x) 5 5 12
Mkt cap (S$m) 623.2 576.8 452.4
Tgt Mar cap (S$m) 731.2 -
Stake (%) 12.2 3.3 0.51
Value (S$m) 89.2 18.9 2.33 110.5
Value (S$m) 84.7 32.7 535.0 652.5
Total value (S$ m) No. of shares (in m) Value p er share (S$)
762.9 600.3 1.27
Source: Company, CIMB Research estimates
Figure 9: Sector comparisons
CWT Limited Goodpack Keppel T&T Olam Noble Group Ltd Simple average
Bloomberg ticker CWT SP GPACK SP KPTT SP OLAM SP NOBL SP
Recom. O N O N N
Price (Local) 1.07 1.70 1.27 2.40 1.50
Target price Mkt cap (Local) (US$ m) 1.27 529 1.75 698 1.61 579 2.41 4,853 1.61 7,974
O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB Research
[ 6 ]
Core P/E (x) CY2011 CY2012 14.1 10.9 15.1 13.2 9.3 8.2 15.5 12.0 10.9 9.9 13.0 10.9
3-yr EPS CAGR (%) 30.3 9.7 13.3 23.3 27.1 20.7
P/BV (x) CY2011 1.4 2.7 1.8 2.3 1.6 2.0
ROE (%) CY2011 11.2 18.4 20.5 19.3 16.0 17.1
Div yield (%) CY2011 1.9 1.7 3.2 1.9 2.4 2.2
Financial tables PROFIT & LOSS (S$ m, FYE Dec) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates’ contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m)
KEY RATIOS 2009 624 (563) 61 (24) 37 0 6 0 0 42 (6) (3) 34 574 574
2010 747 (723) 24 9 33 2 5 150 0 189 (7) (3) 179 589 590
2011F 1,880 (1,789) 91 (39) 52 (1) 6 5 0 61 (6) (6) 50 595 600
2012F 2,297 (2,190) 106 (42) 65 1 7 0 0 73 (8) (7) 59 600 600
2013F 2,602 (2,485) 118 (46) 71 2 9 0 0 83 (9) (7) 66 600 600
2009 184 46 52 282 90 2 136 166 394 126 165 17 308 14 44 58 292 18 0.43
2010 217 50 135 402 203 3 146 0 352 140 16 30 186 3 118 121 427 20 0.64
2011F 498 53 190 741 101 144 103 0 348 192 60 60 312 181 100 281 468 25 0.69
2012F 532 53 151 736 148 206 157 0 512 265 70 86 421 210 67 277 515 32 0.77
2013F 601 53 165 819 160 235 178 0 573 302 63 195 559 188 34 222 569 39 0.86
BALANCE SHEET (S$ m, end Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders’ funds Minority interests NTA/share (S$)
2009 3.5 11.3 6.8 5.4 N/A 13.0 33.8 79.6 0.9 73.7
2010 19.8 (60.9) 25.3 24.0 N/A 3.7 28.0 71.4 1.3 68.5
2011F 151.6 281.1 3.3 2.7 N/A 9.7 24.0 20.0 28.0 37.3
2012F 22.1 16.9 3.2 2.5 N/A 11.3 20.5 25.0 32.8 42.2
2013F 13.3 10.6 3.2 2.5 N/A 11.1 18.2 25.0 32.9 42.3
2010 302 8 27.5%
2011F 1,802 9 14.5%
2012F 2,793 9 13.0%
2013F 2,865 9 12.5%
KEY DRIVERS
CASH FLOW (S$ m, FYE Dec) Pretax profit Depreciation & non–cash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt)
(FYE Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days)
(FYE Dec) Contract amt for material logistics Available storage capacity (cbm) Freight forwarding growth (%)
12M - FORWARD FD CORE P/E (X) 2009 42 24 (19) (6) (19) 23 (42) 7 1 (34) 36 0 (11) (4) 21 10 (26) (88)
2010 189 (9) (1) (6) (157) 16 291 (12) 18 297 (148) 13 (47) (4) (187) 126 274 185
2011F 61 39 (42) (6) 0 53 (280) (5) (80) (365) 339 0 (12) 0 327 14 (325) (140)
2012F 73 42 (42) (8) 0 65 (34) (10) 0 (44) 39 0 (12) 0 27 47 8 (132)
2013F 83 46 49 (9) (45) 124 (68) (2) 0 (70) (30) 0 (12) 0 (42) 12 42 (90)
Source: Company, CIMB Research, Bloomberg
[ 7 ]
20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
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[9]
RECOMMENDATION FRAMEWORK #2 ** STOCK RECOMMENDATIONS
SECTOR RECOMMENDATIONS
OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months.
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TRADING BUY: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months.
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[ 10 ]
CWT Limited
OUTPERFORM
Maintained
S$1.07
@05/09/11
Original earnings base resilient
SINGAPORE
6 September 2011
Target: S$1.27 Logistics
CWT SP / CWTD.SI
Kenneth Ng CFA +65 6210 8610 – [email protected]/ Daniel Lau +65 6210 8614 – [email protected]
• Earnings resilience and strong financials. We lower our FY11-13 earnings by 725% to incorporate lower base-metal trading assumptions in view of slower global economic growth. This lowers our SOP-based target price to S$1.27 (from S$1.74). Re-rating catalysts are expected from higher margins and larger commodity trading contracts secured. CWT is trading at 9.8x CY13 EPS, below its 4-year forward mean of 14x. Even incorporating a 30% probability of recession (CIMB estimate), CWT should trade at least at 12x, in our reckoning. • Resilient base. We believe CWT’s original revenue streams will be resilient in a downturn. CWT’s contract-logistics and freight-forwarding operations should be supported by thicker margins and stronger demand for less-than-container-load shipments. Stronger coffee and cocoa harvests and new contributions from tobacco should also boost its soft commodity business in Europe. CWT is, moreover, moving up the learning curve in thermal coal trading, which is gaining traction. • Uncertainties from new venture. The only earnings risk we envision comes from its newly acquired base metal trading. CWT’s base metal trading volumes could dry up and margins could be squeezed as metal stockpiles increase. We have cut our earnings estimates by 20-33%, to account for a potential downturn. • Strong financials. CWT is well-positioned to weather a potential downturn, with a low net gearing of 0.4x. It can also fall back on its warehouses to fund upcoming capex requirements. Financial summary FYE Dec Revenue (S$ m) EBITDA (S$ m) EBITDA margins (%) Pretax profit (S$ m) Net profit (S$ m) EPS (S cts) EPS growth (%) P/E (x) Core EPS (S cts) Core EPS growth (%) Core P/E (x) Gross DPS (S cts) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) Net cash per share (S$) P/FCFE (x) EV/EBITDA (x) % change in EPS estimates CIMB/Consensus (x)
2009 623.9 60.9 9.8% 42.4 33.9 5.9 (54.1%) 18.0 5.9 54.0% 18.0 2.0 1.9% 2.1 11.6% 28.5% N/A 23.9 11.8
2010 747.2 23.8 3.2% 189.4 179.0 30.4 414.2% 3.5 5.0 (15.9%) 21.4 8.5 8.0% 1.5 41.9% N/A 0.31 3.8 19.4
2011F 1,880.2 90.9 4.8% 61.5 50.0 8.4 (72.4%) 12.7 7.5 51.4% 14.1 2.0 1.9% 1.4 10.7% 28.4% N/A 24.1 8.8 -7.2% 0.95
2012F 2,296.6 106.2 4.6% 73.3 58.6 9.8 16.2% 10.9 9.8 29.6% 10.9 2.0 1.9% 1.2 11.4% 24.1% N/A 10.8 7.6 -19.7% 0.95
2013F 2,602.1 117.5 4.5% 82.6 66.1 11.0 12.9% 9.7 11.0 12.9% 9.7 2.0 1.9% 1.1 11.6% 14.9% N/A 27.2 6.5 -24.8% 0.87
Source: Company, CIMB Research, Bloomberg
Price chart
Market capitalisation & share price info
1.5
2.00
1.4 1.3
1.50
1.2
1.00
1.1 1.0
0.50 0.9 0.8 S e p-10
0.00 Fe b-11 Volume 10m (R.H.S c a le )
Source: Bloomberg
J ul-11 CWT Limite d
Market cap 12-mth price range 3-mth avg daily volume # of shares (m) Est. free float (%) Conv. secs (m) Conv. price ( )
S$639m/US$529m S$1.39/S$0.91 1.8m 600 100.0
Share price perf. (%) 1M 3M 12M (6.9) (9.4) 26.7 Relative (13.8) (19.3) 17.0 Absolute % held Major shareholders 57.3 C&P Holdings and Senior Management 4.7 Morgan Stanley 2.7 EDB Investment
Source: Company, CIMB Research, Bloomberg
Please read carefully the important disclosures at the end of this publication.
Earnings resilience “Sticky” warehousing demand, stronger margins. Warehousing, or contract logistics, contributed 24% to CWT’s FY10 revenue. CWT also provides third-party logistics services to its tenants. Such services include chemical blending, packaging, handling and point-to-point transportation. Revenue from such services usually makes up the bulk of contract logistics revenue, though margins tend to be lower than pure warehousing rental, as CWT almost does not incur any operating expenses on space rental. During a downturn, clients move fewer goods out of CWT’s warehouses, which reduces its third-party logistics revenue but increases its rental income. Consequently, contract logistics margins improve, protecting the bottom line. Figure 1: CWT’s core earnings are resilient, even during a downturn Stable earnings through downturns
Core margins on a general uptrend
PBT adj for other inc & ex p*
Gross margins
In S$m 36.0
40 30
26.0
26.7
2007
2008
39.6
9.6 10
4.7
2.9
2003
2004
2005
2006
2009
PBT margins
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
16.6
20
Operating margins
2010
2003
2004
2005
2006
2007
2008
2009
2010
Source: Company, CIMB Research * In calculating CWT’s adjusted core PBT and margins, we have stripped out other income and other expenses.
Increasing warehouse capacity; higher average rents. CWT also enjoys earnings support as new warehousing capacity comes on stream. In a downturn, leasing risks are mitigated as CWT only begins construction on sufficient demand. Prior to completion, the bulk of its new warehousing space would have been filled up. In addition, as CWT adds new warehouses, average monthly psf rentals would be lifted, as new and more modern facilities command higher rents. From 2011 to 2013, it has a strong warehousing expansion pipeline. The group recently completed the construction of CWT Hub 3, a 830k sf facility which will add 330k sf of capacity once completed in 4Q11. CWT is also looking to commence the construction of a 725k sf CWT Cold Hub 2, which is expected to be completed by 3Q12. Figure 2: Contract logistics contributions should continue to grow Estimated warehouse space and average monthly rents Warehouse spaces
12.0 8.0
0.95 0.60
0.65
0.68
0.75
2.0
4.0
5.0
6.2
7.2
0.99
1.05
0.80
6.0 4.0
8.5
In S$
250
1.20
200
1.00
9.3
9.6
10.0
2006 2007 2008
Third party logistics
Estimated av erage monthly rent (RHS)
In m sf
10.0
Estimated contract logistics revenue^
0.80
150
0.60
100
0.40 0.20
50
0.00
0
2009 2010 2011F 2012F 2013F
39 29
40
52
131
115
102
2007
2008
2009
68 2006
Warehousing rev enues
56
72
82
92
126
125
115
120
2010
2011F 2012F 2013F
Source: Company, CIMB Research estimates ^Historical warehousing and third party logistics revenues are based on CIMB Research estimates as CWT does not publish such numbers
Freight-forwarding volumes could be supported; margins could improve too. While a downturn will lower trading volumes, it could increase the demand for less-thancontainer-load shipments. With lower demand for goods, producers will not be able to export sufficient volumes to fill up whole containers. To export economically, they will have to ship their goods out in less-than-container loads, potentially supporting CWT’s [ 2 ]
freight-forwarding volumes. In addition, declining freight rates in a downturn could boost CWT’s freight-forwarding margins. In freight forwarding, CWT enters into contracts with its clients first, before booking container space. Declining freight rates will be beneficial to CWT, as CWT will be able to widen its freight-forwarding spreads. Soft commodities less affected by downturns. CWT’s increasing exposure to soft commodities should also improve its earnings stability in a downturn. Its soft commodity logistics business in Europe largely depends on the production volume of cocoa, coffee and tobacco, which is more affected by weather conditions than economic conditions, as demand for coffee and cocoa tends to be rather resilient. CWT’s 1H11 commodity logistics earnings had improved significantly yoy, boosted by strong commodity logistics volume as well as maiden contributions from its South African subsidiary, Aquarius Shipping International, a tobacco freight forwarder. Going forward, we believe CWT’s commodity logistics operations will be supported by strong coffee and cocoa production as well as maiden contributions from tobacco. Figure 3: Commodity logistics earnings tend to be stable Commodity logistics revenue had picked up in 1H11
Estimated commodity logistics revenue In S$m 190
Commodities logistics rev enues
In S$m 60
58
170
55 50 45 40
Commodities logistics rev enues
34
32
34
32
27
30
70
61
50
2Q11*
1Q11*
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
2012F
90
25 1Q09
2011F
110
34
31
168
120
130
35 30
156
137
150 37
152
2008
2009
2010
2013F
Source: Company, CIMB Research estimates * 1Q11 and 2Q11 commodities logistics revenues are different from reported numbers as we have stripped out estimated coal logistics contributions..
Earnings downside limited Fluctuations in thermal coal trading; but contributions are too small. 2Q11 margins fell due to losses on several thermal coal shipments to China. We believe this was due to ineffective pricing, with gross spreads insufficient to cover transportation and freight-forwarding costs. Going forward, we believe management would have moved up the learning curve, minimising such loss-making shipments. In addition, coal trading has yet to make significant contributions. In 1H11, coal trading contributed 8% to CWT’s revenue and we believe contributions to the bottom line would have been less, due to thin margins. Therefore, fluctuations in coal trading earnings should have a minimal impact on CWT’s bottom line. Volatility in base metal trading… Following the consolidation of MRI, base metal trading will be CWT’s largest earnings contributor. MRI’s trading volume depends on the demand for base metals (copper, zinc, lead) which are often used in manufacturing and construction. As trading volumes could dry up in an economic downturn, we have lowered our base metal trading volume assumptions and slashed our FY11-13 base metal trading contributions by 20-33%. This constitutes the major part of our earnings downgrade.
[ 3 ]
Figure 4: Base metal trading volume and revenue assumption revision Copper Volumes ('000 metric tonnes) FY11 FY12 FY13
Previous 570 1,344 1,111
Current 412 867 913
% ch ange -28% -35% -18%
Lead Volumes ('000 metric tonnes) FY11 FY12 FY13
Previous 133 378 444
Current 126 273 312
% ch ange -6% -28% -30%
Volumes ('000 metric tonnes) FY11 FY12 FY13
Previous 77 200 200
Current 43 97 110
% ch ange -45% -51% -45%
Overall revenues (S$ mn) FY11 FY12 FY13
Previous 1,400 2,200 2,200
Current 1,044 1,473 1,741
% ch ange -25% -33% -21%
Zinc
Source: CIMB Research estimates
…but maiden contributions from MRI. We expect MRI to contribute to CWT’s bottom line, even in a downturn. In base metal trading, traders attempt to make spreads by flipping metal concentrate contracts between producers and smelters. Base metal concentrate contracts are quoted based on prices excluding Treatment Charges and Refining Charges, which are costs incurred to prepare metal concentrates for production into metal products. Margins could be squeezed by fluctuations in treatment and refining charges. Volatility could be induced by lower global refining capacity. Sufficient metal stockpiles could also bestow stronger bargaining power on smelters and refiners. We believe investors will be concerned about potential losses by MRI. However, we believe the possibility is small. According to management, MRI has a robust risk management control system, which is essential to limiting losses. In addition, CWT has hired a base metal trading veteran, Mr Mark Loewe, as CEO of its base metal trading operations. Lastly, CWT has retained MRI’s experienced traders. We believe the above will limit any earnings downside. Figure 5: Though we lower our earnings expectations, we believe MRI will contribute to the bottom line Historical and estimated trading volume In 000 mt
Copper
2,000 120 1,500
67 357
480
Lead
1,007
950
8% 75 250
85 251
97 273
110 312
6% 3.5%
824
867
913
2%
-
0% 2006
2007
2008
2009
7.7% 6.7%
2010 2011F 2012F 2013F
4.3%
3.3%
[ 4 ]
Zinc
7.6%
4.7%
4.3%
3.7%
2007
2008
5.0%
5.1%
5.3%
5.5%
2.1%
2.1%
2.3%
2.5%
1.8%
2.0%
2.2%
2.4%
2010
2011F 2012F 2013F
3.7%
1.9% 2006
Source: Bloomberg, MRI fact sheet, CIMB Research estimates * Historical market share based on CIMB Research estimates
Lead
6.1%
4%
1,200 800
Copper
10%
500
550
1,200
In 000
Zinc
140 140
1,000 500
Estimated market share*
2009
Figure 6: Estimated base metal trading revenue contributions* Copper
In S$bn 3.0 2.5
0.00 0.04
2.0
0.02 0.07
1.5 1.0
2.0
Zinc
0.04 0.12
2.3
Lead
2.0
0.5
0.11
0.02 0.06
1.5
1.5
2009
2010
0.04
0.02 0.06
0.03 0.07
0.02 0.06
2.0
1.6
1.4
0.0 2006
2007
2008
2011F
2012F
2013F
Source: Bloomberg, CIMB Research estimates * Historical revenues based on CIMB Research estimates
Healthy balance sheet Low gearing; strong cash flows and ample financing lines. Net gearing is low, at 0.4x. In addition, cash flows from CWT’s core logistics operations are S$20m-S$30m annually. Lastly, CWT has a stable of warehouses available for monetisation to shore up its balance sheet or fund future capex requirements. Monetisation of warehouses as early as next year? In our estimation, CWT will require S$130m-170m over the next three years for the following capex: i)
S$40m-50m for the construction of CWT Cold Hub 2.
ii)
S$80m-90m for the construction of a 1.2m sf warehouse for AIMS REIT, based on a construct-and-leaseback contract.
iii)
S$10m-15m for the construction of simple base metal concentrate blending facilities in South America.
iv)
S$1m-5m for the construction of thermal coal blending facilities in Indonesia.
v)
S$5m-10m for the construction of a transport hub in Singapore, a multimodal hub for loaded containers and chassis parking.
Management sees existing low interest rate environment as an opportune time to increase leverage and raise profitability. However, management does not rule out the possibility of divesting another asset to fund its capex requirements, depending on funds availability. In addition, any economic downturn and liquidity crunch could cause CWT to turn prudent by not increasing leverage but to resort to warehouse divestments for funding capex instead, in our view. Figure 7: Potential warehouses for sale No. 1 2 3 4 5 6 7 8
Facilities CWT Logistics Hub 1 @ Tanjong Penjuru Distripark @ Pioneer Sector 1&2 Distripark @ Toh Guan Road East Distripark @ 7 Kwong Ming Road CWT Distripark@ 47/47A Jalan Buroh Pandan Logistics Hub CWT Hub 3 Cold Hub 2 Total
Sq ft (GFA) 375,233 118,080 114,882 47,086 739,243 323,066 834,430 725,000 3,279,524
Selected properties covered by ROFR to Cache Logistics T rust No. 1 2 3 4
Facilities Pandan Logistics Hub CWT Hub 3 Cold Hub 2 CWT Logistics Hub 1
Sq ft (GFA) 323,066 834,430 725,000 375,233
Source: Company, Cache Logistics Trust 2Q11 results presentation, CIMB Research
[ 5 ]
Stake 100% 100% 100% 100% 100% 100% 100% 100%
Comments
Ready by 4Q11 Ready by 2Q11 Ready by 3Q12
Valuation and recommendation Maintain Outperform. While we have cut our earnings estimates by 7-25%, we believe CWT’s earnings growth in the next few years could still be supported by stronger margins, continued warehouse-capacity expansion and a diversified business. Lowering SOP target price to S$1.27 (from S$1.74). Following our earnings downgrade, our SOP valuation drops to S$1.27. We are now ascribing 12x P/E to CWT’s logistics operations (formerly 15x), on an amalgamation of a base-case 15x target and a 30% chance of trough valuations of 4x. For its coal and base metal trading operations, we have lowered our P/E from 7x to 5x, at a discount to Glencore’s existing 6x valuation. Lastly, we have also extended our investment horizon to 2013 and take the opportunity to roll over our earnings multiples to CY13. Figure 8: SOP valuation Investments
Price (S$) 0.98 0.485 0.205
Cache Logistics Trust Cambridge REITs AA REIT Total fin ancial assets
Core operations MRI (base metal trading) Coal trading Logistics Core operations value (S$ m)
Target price ( S$) 1.15 -
No. of shares (m) 635.9 1189.2 2207.1
CY13 PATMI (S$m) 15.5 6.0 44.5
Target P/E (x) 5 5 12
Mkt cap (S$m) 623.2 576.8 452.4
Tgt Mar cap (S$m) 731.2 -
Stake (%) 12.2 3.3 0.51
Value (S$m) 89.2 18.9 2.33 110.5
Value (S$m) 84.7 32.7 535.0 652.5
Total value (S$ m) No. of shares (in m) Value p er share (S$)
762.9 600.3 1.27
Source: Company, CIMB Research estimates
Figure 9: Sector comparisons
CWT Limited Goodpack Keppel T&T Olam Noble Group Ltd Simple average
Bloomberg ticker CWT SP GPACK SP KPTT SP OLAM SP NOBL SP
Recom. O N O N N
Price (Local) 1.07 1.70 1.27 2.40 1.50
Target price Mkt cap (Local) (US$ m) 1.27 529 1.75 698 1.61 579 2.41 4,853 1.61 7,974
O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB Research
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Core P/E (x) CY2011 CY2012 14.1 10.9 15.1 13.2 9.3 8.2 15.5 12.0 10.9 9.9 13.0 10.9
3-yr EPS CAGR (%) 30.3 9.7 13.3 23.3 27.1 20.7
P/BV (x) CY2011 1.4 2.7 1.8 2.3 1.6 2.0
ROE (%) CY2011 11.2 18.4 20.5 19.3 16.0 17.1
Div yield (%) CY2011 1.9 1.7 3.2 1.9 2.4 2.2
Financial tables PROFIT & LOSS (S$ m, FYE Dec) Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates’ contribution Exceptional items Others Pretax profit Tax Minority interests Net profit Adj. wt. shares (m) Unadj. year-end shares (m)
KEY RATIOS 2009 624 (563) 61 (24) 37 0 6 0 0 42 (6) (3) 34 574 574
2010 747 (723) 24 9 33 2 5 150 0 189 (7) (3) 179 589 590
2011F 1,880 (1,789) 91 (39) 52 (1) 6 5 0 61 (6) (6) 50 595 600
2012F 2,297 (2,190) 106 (42) 65 1 7 0 0 73 (8) (7) 59 600 600
2013F 2,602 (2,485) 118 (46) 71 2 9 0 0 83 (9) (7) 66 600 600
2009 184 46 52 282 90 2 136 166 394 126 165 17 308 14 44 58 292 18 0.43
2010 217 50 135 402 203 3 146 0 352 140 16 30 186 3 118 121 427 20 0.64
2011F 498 53 190 741 101 144 103 0 348 192 60 60 312 181 100 281 468 25 0.69
2012F 532 53 151 736 148 206 157 0 512 265 70 86 421 210 67 277 515 32 0.77
2013F 601 53 165 819 160 235 178 0 573 302 63 195 559 188 34 222 569 39 0.86
BALANCE SHEET (S$ m, end Dec) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders’ funds Minority interests NTA/share (S$)
2009 3.5 11.3 6.8 5.4 N/A 13.0 33.8 79.6 0.9 73.7
2010 19.8 (60.9) 25.3 24.0 N/A 3.7 28.0 71.4 1.3 68.5
2011F 151.6 281.1 3.3 2.7 N/A 9.7 24.0 20.0 28.0 37.3
2012F 22.1 16.9 3.2 2.5 N/A 11.3 20.5 25.0 32.8 42.2
2013F 13.3 10.6 3.2 2.5 N/A 11.1 18.2 25.0 32.9 42.3
2010 302 8 27.5%
2011F 1,802 9 14.5%
2012F 2,793 9 13.0%
2013F 2,865 9 12.5%
KEY DRIVERS
CASH FLOW (S$ m, FYE Dec) Pretax profit Depreciation & non–cash adj. Working capital changes Cash tax paid Others Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Cash interest & others Cash flow from financing Change in cash Change in net cash/(debt) Ending net cash/(debt)
(FYE Dec) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rates (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days)
(FYE Dec) Contract amt for material logistics Available storage capacity (cbm) Freight forwarding growth (%)
12M - FORWARD FD CORE P/E (X) 2009 42 24 (19) (6) (19) 23 (42) 7 1 (34) 36 0 (11) (4) 21 10 (26) (88)
2010 189 (9) (1) (6) (157) 16 291 (12) 18 297 (148) 13 (47) (4) (187) 126 274 185
2011F 61 39 (42) (6) 0 53 (280) (5) (80) (365) 339 0 (12) 0 327 14 (325) (140)
2012F 73 42 (42) (8) 0 65 (34) (10) 0 (44) 39 0 (12) 0 27 47 8 (132)
2013F 83 46 49 (9) (45) 124 (68) (2) 0 (70) (30) 0 (12) 0 (42) 12 42 (90)
Source: Company, CIMB Research, Bloomberg
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SECTOR RECOMMENDATIONS
OUTPERFORM: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months.
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NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months.
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UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months.
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TRADING BUY: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 3 months.
TRADING SELL: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 3 months.
TRADING SELL: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 3 months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB Research Pte Ltd (Co. Reg. No. 198701620M)
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RECOMMENDATION FRAMEWORK #2 ** STOCK RECOMMENDATIONS
SECTOR RECOMMENDATIONS
OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months.
NEUTRAL: Expected total returns of between -15% and +15% over the next 12 months.
NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months.
UNDERPERFORM: Expected negative total returns of 15% or more over the next 12 months.
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months.
TRADING BUY: Expected positive total returns of 15% or more over the next 3 months.
TRADING BUY: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months.
TRADING SELL: Expected negative total returns of 15% or more over the next 3 months.
TRADING SELL: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
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