• Prices fully hedged in Commodity SCM
• +38% GFA to drive Logistics’ 16% CAGR
•   Higher fair value estimate of S$01.87

Rising fair value estimate to S$1.87

We maintain our BUY but derive a new fair value estimate of S$1.87 (previous S$1.68) via SOTP. The counter is trading at 6.4x FY14F PER, representing a steep discount to its peer Kerry Logistics Network (x19.1 PER). We think this is due to over-estimation of risks in Commodity SCM and lack of clarity on earnings growth ahead. Furthermore, we believe our valuation is conservative on the following counts: 1) each business segment uses a below-average PER, 2) value of warehouse portfolio derived excludes overseas warehouses, and 3) assumed psf price is at 10% discount to similar warehouses.

Misperceived risks about Commodity SCM

We understand from management meeting that CWT fully hedges prices in its Commodity SCM business, rendering the trades back-to-back and eliminating risk of losses through adverse price movements. As CWT makes a fixed premium on a per-weight trading basis, its results are not likely to be correlated to commodity price movements. In addition, we think the sub-1% profit margin is not a concern as the returns are magnified through leverage (10.3x in FY13), yielding a reasonable 7.3% ROE.

Nevertheless, volatility in earnings is likely to come from energy products which are opportunistic in nature as compared to nonferrous which is more towards long-term contracts. In terms of counterparty risk, we think it is reduced, though not eliminated, through dealing with mainly state-owned companies and MNCs. Overall, we think Commodity SCM business is less risky than perceived while we expect FY14 core earnings to come in higher (+%64 to S$34m) as energy products make a full-year contribution. Our estimation is well within management’s guidance that normalised earnings are between S$20m to S$50m.

New and redeveloped warehouses drive to Logistics business’ growth

Three redeveloped/new warehouses will receive TOP in FY14. Collectively, the trio will increase CWT’s portfolio’s total GFA by 38% to 7.2m sq ft, which we estimate to deliver a substantial 16% CAGR in Logistics’ core earnings over FY14-FY15.

Source: OCBC Research - 27 Mar 2014