• 1H16 core PATMI in-line
• Still in discussion with HNA group
• Maintain HOLD

Unrealized MTM loss of S$17.1m in 1H16

CWT Limited’s (CWT) 2Q16 revenue decreased 15.0% YoY to S$2.37b, mainly due to lower commodity trading volume and a general drop in commodity prices amid a downturn in commodity sector. Despite a 1.8ppt YoY increase in logistics gross margin to 15.8%, 2Q16 gross profit fell 11.2% to S$67.1m due to unrealized mark-tomarket (MTM) accounting losses arising from its commodity marketing (CM) business and a 0.3ppt YoY decline in CM gross margin. Consequently, 2Q16 PATMI plunged 47.8% to S$13.7m.

For 1H16, revenue and gross profit fell 14.7% and 5.2% to S$4.24b and S$150.7m, respectively, on similar reasons as 2Q16. During 1H16, the increase in certain commodity prices led to unrealized MTM losses recognized in the P&L for futures/forward contracts taken up for hedging purposes.

As corresponding inventory is stated at lower of cost or net realizable value, the MTM gain on inventory was not recognized, which led to an accounting loss of S$17.1m. Consequently, stripping out MTM loss and other one-off items, CWT’s 1H16 core PATMI rose 20.1% to S$64.5m, which formed 55% of our FY16 forecast.

Gross margin for logistics business stabilizing

Looking ahead, we expect commodity marketing to remain weak, and do not rule out more unrealized mark-to-market losses. However, we expect the heavyweight contributor, CWT’s logistics business, to partially offset weakness from CM segment.

With logistics’ gross margin stable at ~15.8% over the past three quarters, we expect this stability to continue. And with the mega logistics hub still on track to complete by 1H17, we expect meaningful contribution from FY18 onwards as it may take time to fill up the spaces.

Meanwhile, CWT has announced talks with HNA Group for the potential transaction is still in progress. With no concrete details at this moment, we prefer not to speculate but wait for further clarity.

No interim dividend declared

While 1H16 results were in-line, on uncertain CM business outlook, we cut our FY16/17F core PATMI by 12.2%/18.2%. As we roll-forward our valuations to blended FY16/17F core PATMI (SOTP method), our FV drops from S$1.95 to S$1.93. Maintain HOLD.  

Source: OCBC Research - 15 Aug 2016