CWT

[greengiraffe]

Can state from which house coverage?

Churning On Commodities
VALUATION

CWT is currently trading at a 2014F PE of 8.1x based on Bloomberg consensus
EPS estimate of 18.4 S cents. This is
in comparison to its 3-year and 5-year
historical average PEs of 10x and 9x respectively. Forecasted dividend yields are in
the range of 1.7-2.4% for 2014-16.

Net profit for 2014 is projected to grow 4.9% yoy to S$111.2m, based on consensus
estimates. The 3-year (2013-16F) projected CAGR is 7.2%.

Consensus 12-month target price of S$1.69 translates to a potential upside of 14.2%
from the current level.
INVESTMENT HIGHLIGHTS

Nailing down its commodity trading business,
which mainly focuses on dealing
copper and naphtha. While the industry is volatile and seasonal in nature, we think
management has been prudent in its risk management thus far. Counterparty risk is
mitigated as clients are mostly state-owned companies and global firms. Volume is
expected to be maintained at current levels, or slightly higher, to avoid being too
aggressive and speculative. Exposure to certain commodities such as agriculure
and steel-related, which are extremely cyclical, are kept to a minimum if not
completely avoided.

Steady S$20m-25m annual earnings contribution in the near term
is within
management’s expectations for the commodity trading segment. While this will be
unevenly recognised on a quarterly basis, the full-year estimate still accounts for
about 19-24% of the group’s net profit (based on 2013) and provides some visibility
going forward. In our view, the potential upside to this range could come from better
margins and higher volume for naphtha, where the optimal niche market stake is in
the range of 10-15% vs CWT’s current 8-10% control.

Financial services – next phase to conquer
as the group continues to create
synergies from its strength in logistics and commodities. CWT’s presence in financial
services is through its brokering subsidiary Straits Financial Group, and trade
solutions associate Westford Trade Services. In 2013, this division only contributed
1% to group revenue. We see the potential for CWT to leverage on its supply chain
management solutions for commodities to expand its scope of brokering services to
commodity-related firms in Asia. With a conservatively moderate growth outlook on
the other divisions, we think it is possible that management will look to derive its
upside in the medium to long term from this division.