Event:
CWT announced yesterday its biggest acquisition to date, agreeing to pay US$94m (S$116.5m) for a 73.8% stake in MRI Trading AG, a Switzerland-based commodity trading house. This highly-accretive investment is exactly in line with what we have been saying about the company’s strategic move from commodity logistics to commodities trading. Maintain BUY.
Our View:
MRI is among the top 3-4 players in the world for base metals trading (mainly copper, zinc and lead), behind Glencore but larger than Noble. In recent times, it has generated revenue of more than US$2b and an average profit of about US$20m. We estimate the earnings accretion is substantial, at 40-45% of current year core earnings.
We believe the purchase valuation (about 6x PER and 1.5x P/B) is a fair one, with sufficient mechanisms to align all parties. CWT has had dealings with MRI for a few years and has been tracking it as an M&A target for about a year. During this time it has established a rapport with all the key personnel/traders, most of whom have agreed to stay on.
CWT is trying to break into commodities trading and MRI represents the best purchase possible. Management will be consolidating this with its existing coal trading team and a metals team which it recently hired from Louis Dreyfus. We believe there will be sufficient “buy-in” among all parties to make the acquisition a success. We also expect there will be revenue/ cost synergies, with MRI strong in physical trading and CWT strong on the logistics side of the business, as well as market knowledge of places like China.
Action & Recommendation:
The transaction is expected to be completed within three months and will contribute fully in 2012. CWT has a net cash position of $120.6m and can comfortably pay for this acquisition, which will change its earnings and ROE profile substantially. We factor this development into our FY12 and FY13 numbers but keep our target price based on FY11F unchanged for now. Maintain BUY.
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