Event
CWT announced yesterday that it has entered into an agreement to develop a $135m warehouse for AIMS AMP Capital Industrial REIT (AACI REIT). This marks its debut as a warehouse developer for a non-related third party. In our view, it signals recognition for its capability in this field and suggests that CWT’s warehouse development business might be more sustainable than the market has believed.
Our View
Under the terms of the agreement, CWT will undertake to design and construct a warehouse at 20 Gul Way within the Jurong Industrial Estate. Upon completion, the company will sign a master lease agreement with AACI REIT for the property for 4-5 years. This arrangement is not unlike the sale-leaseback model it has with Cache REIT, except that CWT does not need to fund the project at all.
We see three benefits from this undertaking. First, CWT stands to reap a development profit estimated at $40m, or about 30% of the project cost. Second, there will be a handy revenue stream for its logistics business once the warehouse is completed in 28 months’ time. Finally, immediate availability of land with all the relevant permits from JTC to boot, with its own landbank untouched.
As we have repeatedly highlighted, CWT’s warehouse development business is an attractive one with high entry barriers. We believe it has been chosen for this project because of its ability to guarantee tenancy, given its market leadership position in logistics in Asia. That it can now develop on third-party land signifies progress and implies that this business is more sustainable than the market believes.
Action & Recommendation
For this project, no investment is required of CWT. It needs just to fork out working capital of $5-10m and subscribe for units in AACI REIT to the tune of $2.5m. We keep our estimates intact as the auditors discuss how the profit (possibly $40m) will be recognised (likely progressively over the next 28 months). Maintain BUY with a SOTP-based target price of $1.90.
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