• Core 1H17 lifted by commodity marketing
• Logistics margin to soften ahead
• Pre-conditional offer supports share price

Recorded One-off Gain of S$23.1m in 2Q17

CWT Limited’s (CWT) 1H17 revenue surged 22.4% YoY to S$5.19b, on higher contributions from: 1) logistics services (+6.7%) with improved performances at Commodity Logistics business, 2) commodity marketing (+23.9%) as a result of increased trading volume in general and higher naphtha prices, and 3) engineering services (+83.4%) due to finalisation of a non-recurring design and build project (revenue recognition in 2Q17), but partly offset by weaker performance at financial services (-25.8%) due to fewer structured trade opportunities.

Gross profit margins were largely stable across all its business segments except for logistics, which saw a drop of 1.7ppt YoY to 14.1%, mainly due to weaker market conditions amid strong competition.

We expect the weak margin at logistics to persist as CWT incurs start-up costs in 2H17 for its new mega logistics hub. Consequently, as operating expenses fell 2.0% YoY to S$90.4m, 1H17 PATMI jumped 114.7% to S$80.2m. However, stripping out one-off items including a S$23.1 realized gain from the nonrecurring engineering project, CWT’s 1H17 core PATMI declined 6.7% to S$54.7m.

Lower FV on Weak Logistics Margins

While 2H17 core PATMI formed 57.8% of our FY17 forecast, we expect CWT’s logistics segment to weaken further on aforementioned reasons. Factoring in the one-off items recorded in 1H17, we raise our FY17F PATMI by 22.6% (but pare our FY17F/18F core PATMI by 7%/4%). Consequently, our SOTP-derived FV decreases from S$1.95 to S$1.91.

Our rating of ACCEPT THE OFFER, when the formal VGO is made by HNA (currently pending HNA shareholders’ approval), remains unchanged. However, we continue to recommend investors to stay cautious amid China’s regulator’s probe on HNA overseas loans, which we believe creates uncertainty over the success its takeover bid for CWT.

With no visibility over the outcome, it makes sense for shareholders to reduce their risk by selling part of their holdings in the market.

Source: OCBC Research - 2 Aug 2017