CWT (Kim Eng)

Event:
CWT announced the sale-leaseback of Jinshan Chemical Warehouse to Cache REIT last week. This asset has a balance sheet value of S$6.7m against a sale price of S$13.5m, a difference of 101%. The move is another solid piece of evidence that supports our argument that there is substantial value yet to be unlocked from CWT’s balance sheet. Our warehouse portfolio value assumption of $380m (vs PPE balance sheet value of $260m) looks unaggressive. Maintain BUY.

Our View:
This type of sale should not be interpreted as CWT selling its family jewels for a quick gain, as the company will always seek opportunities to replenish its “landbank”. Since the current management took over in 2005, it has consistently netted such gains in 2006 ($10.6m), 2007 ($9m), 2008 ($46m) and 2010 ($147.6m).

Although the market has traditionally discounted this warehouse development aspect of CWT’s business, deeming such earnings exceptional and lumpy, we see value in it. It is no different from commercial or residential property development, except that there are greater barriers to entry in this space as accompanying logistics expertise and client network is needed here.

As an example, CWT sold and leased back the Cold Hub (340,000 sq ft) in 2009 for $122m. The reinvestment into CWT Cold Hub 2 (725,000 sqft) will likely cost about the same amount. We anticipate major divestment gains in 2012 again.

Action & Recommendation:
CWT has a current market cap of $767m. We estimate its warehouse portfolio, ongoing warehouse development projects, financial assets and net cash to be already worth $600m. Furthermore, management has a good track record of sharing its gains. We see deep value and maintain our BUY recommendation with a target price of $1.90, based on sum-of-the-parts valuation.