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CWT: Staying Rooted To Core Strengths And Challenging New Frontiers (Part 2)
Corporate Digest | 02 May 2014
By: Ong Qiuying
Articles (131) Profile
By: Peter Ng
Articles (81) Profile

New Growth Driver

Perhaps the transformational breakthrough came with the acquisition of MRI Trading in 2011, where CWT branched into the commodities business segment. The segment specialises in non-ferrous ores concentrates, refined and precious metals and their related by-products for a global smelting and processing customer base.

Notably, CWT earns from a fixed trading premium made on a per tonnage basis as it acts as an intermediary to support the demand-supply dynamics of the commodity market as opposed to being a commodity trader.

“We do not face significant price risks as our turnover is fully hedged,” Loi pointed out. OCBC Investment Research also noted that this eliminates the risks of losses through adverse price movements.

Notwithstanding the concerns of margins, Loi also emphasised that as long as there is a fixed spread, this is a great business to be in due to the hedging in place as the focal point lies in the spread that is created between the buying and selling price of the materials.

“Generally, when prices of the commodities are volatile, we will be able to take advantage of the wider spread and higher volumes, which will help drive up our earnings and also translate to a higher return on equity for the company,” he added.

Diversifying The Trading Portfolio

A new growth driver to the company, the core base metal concentrates marketing business had been a center point for CWT. As the trading business evolves, CWT added Naphtha, a blending ingredient for fuel, into its portfolio, which was a large boost to the company’s top line.

Asked about the contribution of Naphtha to the group’s business, Loi noted the seasonality of Naphtha usage and cautioned on potential lumpiness of revenue on a quarter-on-quarter basis.

Nonetheless, its underlying driver remains in its ability to sell the product and Loi is confident of that, given that their customers are mostly state-owned companies and multinational companies that ensured demand continuity and reduced counterparty risks.

Backing the sustainable growth prospects, he added that, “In a short span of one year of introducing Naphtha into our commodities portfolio, CWT has already gained 8 percent in market share for the product in the Japanese, Korean and Taiwanese markets.”

Maybank IB Research is also leaning on this segment to record a 20 percent revenue in compound annual growth rate over the next three years as CWT continues to diversify its trading portfolio.

Besides these new developments, CWT is also leveraging on its core strengths in the logistics segment to provide integrated services for its clients. Click to find out more.

To Grow Leaps And Bounds
After incorporating the new business segment, CWT has made tremendous progress in revenue growth. For a three-year period between FY11 and FY13, its revenue has experienced an admirable compound annual growth rate of 52.2 percent.

Excluding short-term revolving credit facilities which are fully secured by liquid assets such as inventories and receivables, CWT’s debt-to-equity ratio has remained well below 1 for the last three years since FY11. “Matching the loan types to our underlying assets and hedging interest rates coupled with our diversified funding sources will enable us to stay nimble in the market, even as global interest rates may fluctuate from the tapering,” Loi opined.

Further, CWT is in favour of maintaining a healthy balance sheet through a capital recycling process, where properties held under the company will be spun off as its balance sheet begins to get weighed down by the increment of assets.

Stepping Ahead
Sharing on CWT’s expansion plans, Loi said, “There are several options to be played, but the theme still falls in China.” This is in spite of its already established presence in Asia, especially China, where it accounted for 41 percent of the company’s revenue. While government policy and intervention may be a challenge for the company, the economy is bolstered by improving global business sentiments.

In addition, the company has provided indications to pursue sustainable growth in earnings per share and dividend payouts moving forward. Given its low historical dividend payout ratio averaging at the 0.2 territory, and boosted further with the potential of a consistent growing dividend payout, CWT has set the stage as a worthy dividend play.

OCBC maintained its “Buy” call on CWT, raising its fair value estimate to $1.87, noting that its valuation is conservative as each business segment uses a below-average price-to-earnings ratio.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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