• 1Q15 results below expectations
• FY15 performance likely to soften
• Downgrade to HOLD on valuation grounds

Weak 1Q15 revenue but higher gross margin

CWT Limited’s (CWT) 1Q15 results came in below our expectations as PATMI declined 16% YoY to S$29.2m and formed only 21.7% of our FY15 forecasts. 1Q15 revenue, however, plunged 59% to S$1.87b. CWT recorded several impairment charges amounting to S$5.5m but also had a gain on disposal of AFS financial assets of S$4.7m. Stripping out one-off items, CWT’s core PATMI declined by 13.2% YoY to S$30.4m. Lower revenue was mainly due to declines recorded in the Commodity Marketing (CM) (-62.5% YoY), Engineering Services (ES) (-12.8%) and Financial Services (FS) (-57.7%) segments, while the Logistics segment grew 3.3%. Notably, overall gross profit margin increased 2.6ppt to 4.5%, explaining the gentler slide in PATMI.

Softer growth outlook in FY15

Going forward, we lower our FY15 revenue expectation significantly but expect overall gross profit margin to remain within the 3.0% region. Looking at 1Q15 results, we expect revenue from the CM segment to decline on lower commodity prices, specifically, Naphtha (~-50% since 2014) and Copper concentrate. The lower prices also led to lower volatility and fewer trades performed. However, we expect GP margin to hold for the CM business as the spread charged by CWT is likely to decrease minimally or stay the same. Similarly, with lower demand for trading, its FS segment’s trade financing business will likely remain soft in FY15. For engineering services, management guided completion of projects in 2Q15, with timeline of new projects unclear. Logistics segment is the only one that we believe will continue to grow, especially with contribution from its Pandan Logistics Hub. We expect to see full contribution from 2Q15 onwards, with margins maintained at ~16% region.

Downgrade to HOLD on valuation grounds

With softer outlook, we cut our FY15F and FY16F PATMI by 12.1% and 8.1%, respectively. Consequently, our SOTP FV decreases from S$1.98 to S$1.88 based on blended FY15/16 earnings. We also note that CWT is currently trading at ~+3.5SD above its 5-year forward P/E. Hence, we downgrade HOLD rating on valuation grounds, as we recommend partial exit to investors.

Source: OCBC Research - 15 May 2015