CWT: A significant acquisition (DMG)

(BUY, S$1.335, TP S$1.73)

CWT acquired MRI Trading AG (MRI), a commodities marketer, for ~US$94m. Taking into account the earnings contribution from MRI, we have lifted our FY11 and FY12 earnings by 24.3% and 48.2% respectively, to hit S$49.5m (core earnings at S$44.4m) and S$61.2m. We remain positive on CWT’s prospects, with its continued focus on building its core business competencies. Maintain BUY with a higher TP of S$1.73, based on 20.8x FY11 earnings (a 20% discount to global peers’ 7-year historical average).

Establishing a significant foothold in supply chain management. CWT announced the acquisition of a 73.81% stake in MRI, a Switzerland-based commodities marketer, for ~US$94m. MRI is a commodity marketing company focused in base metals non-ferrous concentrates. It engages in marketing copper, zinc and lead non-ferrous concentrates and metals, as well as gold, molybdenum concentrates and cobalt concentrates/ metals to smelting and processing customers internationally. MRI also provides trade finance, preexport, structured commodity and project finance and hedge and risk management solutions. In addition, it facilitates logistics and provides operations support services. MRI has international offices in Latin America, Africa and Asia. The acquisition of MRI would be partly funded via debt and cash, with the first payment of US$60.8m due upon completion and the remaining US$33.2m to be paid equally over the next three years. CWT may issue up to 10m new shares (~1.69% of CWT’s issued shares) to MRI’s shareholders as part of the acquisition consideration.

Positive earnings impact. We are positive on the acquisition as MRI, being an established commodities marketer, will strengthen the supply chain management business and logistics service offerings of CWT. We understand that MRI’s earnings in FY10 was ~US$20m. Assuming flat YoY earnings, with a 73.81% stake and earnings contribution for the remaining half of FY11, we estimate CWT’s FY11 earnings could be bumped up by S$9.7m and bring earnings to S$49.5m (+24.3% from earlier estimates). Factoring in the full year contribution of MRI, we have also raised FY12 earnings by 48.2% to S$61.2m. Our FY11 EPS has factored in the maximum issuance of 10m new shares to MRI shareholders.