CWT Limited (CIMB)

OUTPERFORM Maintained
S$1.21 Target: S$1.71
Mkt.Cap: S$714m/US$576m
Logistics

Going asset-light in China

Sale and leaseback to Cache

Raising flexibility in China. CWT announced yesterday it has entered into a sale and leaseback transaction with Cache. The transaction is rather small, at S$13.5m for a 13,547 sq m warehouse in Jinshan, Shanghai. We have lowered our FY11-13 estimates by 0.6-0.8% to account for the financial impact of this transaction. Accordingly, our target price dips from S$1.72 to S$1.71, still based on 19x CY12 P/E, one standard deviation above its 4-year forward average. Overall, the transaction should bestow greater flexibility on CWT’s operations in China, and allow CWT to plough capital into its more profitable freight-forwarding network in China. In addition, following its recent price underperformance, we believe value has emerged. We expect catalysts from faster traction in its Indonesian coal-trading business and potential foray into Mongolian coal trading.

The news

CWT has entered into a sale and leaseback transaction with Cache Logistics Trust. The asset, a 13,547 sq m chemical logistics warehouse in Jinshan, Shanghai, will be sold for Rmb71m (S$13.5m). CWT will book a S$6.86m gain: S$5.15m as a one-time gain and S$1.71m as deferred gains to match its leaseback commitments. CWT will lease back the property for three years, at Rmb1.30 per sq m per day for the first year, with rental escalations of 2% per year for the remaining term.

Comments

Transaction appears to favour Cache at first glance... According to disclosures by Cache Logistics Trust, the property was valued at around Rmb77m by external valuers. However, CWT sold it for Rmb71m, below this appraised value.

… but actually win-win for both. However, we believe the transaction is in line with CWT’s asset-light strategic direction in China. CWT will be able to enjoy greater flexibility in China. Prior to this transaction, the property was developed and operated by CWT for its chemical logistics business in China. However, the scale of this business is small and CWT has been unable to optimise warehousing space, with the result that the asset could not generate very good returns on invested capital. By selling and leasing back, CWT would be able to monetise its asset and redeploy capital to its profitable freight-forwarding business in China. It also has the option to downsize its chemical logistics business after three years.

Will CWT exit China’s warehousing business? We believe opportunities in the Chinese logistics industry will continue to attract CWT. We believe CWT could be heading towards leasing warehouses across China to accommodate the logistical needs of its clients. We do not rule out the possibility of another sale and leaseback for its smaller Tianjin facility (86 sq m) to Cache Logistics Trust.

Slight impact on bottom line. Rental for the first year should approximate S$1.28m, before escalating to S$1.3m in the second and third years. Deferred gains amortisation should provide a buffer of S$570k annually. This means CWT would have to bear an additional S$715k-768k annually for the next three years. Adjusting for corporate taxes, CWT could end up bearing an additional S$300k-400k annually. This lowers our FY11-13 earnings estimates by 0.6-08%.

Valuation and recommendation

Slightly positive; maintain Outperform. We believe the transaction will allow CWT to invest freed-up capital in its more profitable freight-forwarding network in China. In addition, it has the flexibility to downsize its not-so-profitable chemical logistics business in China. Elsewhere, we remain bullish on its Indonesian coal-trading business, which could provide near-term earnings surprises.

CWT’s recent price underperformance has also thrown up value for the stock. We maintain Outperform, albeit with a slightly lower target price of S$1.71 (from S$1.72) after our earnings adjustments. We expect re-rating catalysts from faster traction in its Indonesian coal-trading business and potential foray into Mongolian coal trading.