CWT Limited - Signed a construct-and-leaseback contract (CIMB)

OUTPERFORM Maintained

S$1.31 Target: S$1.74

Mkt.Cap: S$786m/US$654m

Awarded S$135m warehouse construction contract

Target price raised to S$1.74 (from S$1.70), still based on SOP. CWT has been awarded a S$135m warehouse construction contract from AIMS AMP Capital Industrial REIT (AA REIT). The 1.2m sf project will be completed within 28 months, or by Dec 13. Construction will span two phases, with initial contributions expected in FY12. We account for construction gains in our estimates, and lift our FY12-13 estimates by 6-7%, leaving our FY11 forecasts unchanged. The latest development shows CWT’s commitment to maintaining its core advantage in the logistics space, which should provide earnings support and cash flows to fund its quest to become an international commodities logistics behemoth. Re-rating catalysts are expected from better trading margins and faster traction in its commodities logistics expansion.

The news

Construct-and-leaseback contract. CWT has signed a construct-and-leaseback contract with AA REIT. CWT will construct a 1.2m sf, 5-storey ramped-up warehouse at 20 Gul Way for S$135m. The project will be completed in two phases within 28 months, or by Dec 13. CWT will fund the construction through borrowings. Upon completion, it will lease the warehouse from AA REIT. CWT will also subscribe to AA REIT units of at least S$2.5m through a private placement.

Comments

Further details. 20 Gul Way was previously used for waste-recycling purposes. AA REIT had applied for rezoning from JTC to enhance the land’s plot ratio. Following approval, AA REIT inked the contract with CWT to construct a 5-storey ramped-up warehouse with estimated GFA of 1.159m sf. According to management, upon completion, CWT will lease the property back from AA REIT for at least 4-5 years.

Innovative capital recycling. Previously, we had expected CWT to fund its commodities logistics expansion by raising capital through sale-and-leaseback transactions. However, since the group only concluded a sale and leaseback in 2010, CWT will be able to monetise its warehousing assets only in 2012; otherwise, the gains will be taxed. By entering into a construct-and-leaseback contract, CWT will benefit from construction gains; immediate monetisation upon completion; and incremental warehousing revenue from capacity expansion.

Financial impact. We estimate construction costs at around S$100m, similar to that for its CWT Hub 3 (830,000 sf) and 49 Pandan (300,000 sf) developments. CWT could book a total construction gain of S$35m (S$135m minus S$100m) from this project. We expect it to recognise a gain of around S$21m for Phase I and S$14m for Phase II, with Phase I constituting 60% of the project. Assuming it amortises the gains over four years, to offset lease rental expenses upon completion, we raise our FY12-13 estimates by 6-7%.

Any conflicts of interests between AA REIT and Cache Logistics Trust? We believe no. CWT’s S$2.5m subscription of AA REIT units, for a 0.55% stake based on current prices, is small compared with its 12.2% holding in Cache Logistics Trust.

Valuation and recommendation

Maintain Outperform with higher target price of S$1.74 (from S$1.70). Following our earnings upgrade, our target price rises to S$1.74 from S$1.70, still based on SOP valuation. We previously assumed that CWT would continue to monetise its warehousing assets via sale-and-leaseback arrangements and had used RNAV to value CWT’s existing warehouses. However, given that CWT might not monetise its local properties until late 2012 (or 2013) and given that it might not even monetise its overseas properties at all, we now use P/E valuations for its logistics business. We have ascribed 15x P/E to FY12 estimated logistics earnings, based on a slight premium to its historical forward average of 14x, as we see strong earnings catalysts from its commodities logistics business from its commodities futures brokerage operations as well as synergies from its latest acquisition of base-metal trader, MRI. Re-rating catalysts are still expected from better trading margins and faster traction in its commodities logistics expansion.