Transfer coverage with BUY. CWT’s share price has dropped by 28% in the past six months (as earnings disappointed) and we believe value has emerged. We expect some short-term earnings volatility from commodity logistics and commodity trading businesses. Its warehouse portfolios – worth as much as current market capitalization – should provide a strong support to the share price. We like CWT for its stable and cash-generative logistics business, which account for more than 55% of PATMI. We also expect its commodity trading business (40% of PATMI) to derive synergies from its existing logistics capability. Reiterate BUY with SGD1.47 TP, based on SoTP.

Logistics business a gem. YTD logistics business continued to grow steadily on the back of an 8.4% rise in warehouse rental rate. In the next two years, growth will primarily be driven by capacity increase (2m sq ft), which should help to offset any potential compression in rental rates. The three new warehouses (coming in in stages) will add around 20% to total warehouse area.

Commodity trading to generate more synergies in the long run. We see some short-term volatility in commodity trading but expect some improvement in copper trading next year. Furthermore, we expect more synergies and margin enhancements if CWT could integrate its commodity trading with its existing logistics capability. We forecast an average 20% annual revenue growth in commodity trading for FY14-15 driven by the diversification of supply sources and geographic trade flows.

Undemanding valuation. CWT’s warehouse portfolio, which we value at SGD758m, represents 99% of current market cap and 55% of enterprise value. At current price, CWT’s remaining business is valued at 6x FY14 EV/EBITDA, which is at a discount to that of its closest peer Noble (8x EV/EBITDA). Our price target implies 8.8x FY14 P/E and provides a 16% upside.  

Source: Maybank Research - 29 Nov 2013