Public Warehousing Company (PWC) Equity Research Update

Published January 24th, 2006 - 01:21 GMT

Global Investment House – Equity Research Update on Public Warehousing Company stock –  The Public Warehousing Company - KSC & Subsidiaries (PWC) is the market leader in the logistics industry in Kuwait. The company enjoys a near-monopoly in the logistics sector in Kuwait. The company was established in 1979, with its core activities consisting of mobilization, construction, management and leasing of all types of warehouses and warehousing goods under customs supervision both inside and outside of the custom areas in Kuwait. Among the prominent shareholders in the company are the National Real Estate Company, with over 25% stake, and the Public Institution for Social Security, with an over 13% stake. The company's shares are listed on the Kuwait Stock Exchange.

The company has consistently paid dividends in the past. It has also been rewarding its  shareholders with stock dividends year after year over the last three years.

Business Performance of PWC
The company has four main business segments: Facilities Management, Logistics, Customs Solutions, and Value-Added Services.
At the end of October 2005, the company had a total of about 10 million sq. mtr. of land in Kuwait . The company constructs and manages warehouses on its land to offer 2PL and 3PL services to a wide range of clientele. The company enjoys excellent strategic locational advantages, like proximity to the main arterial roads, and main industrial, business and commerce centres of the city. The company has restricted its  property management services mostly to Kuwait, yet over the last two years it has purchased and leased land in other countries, to operate under this segment. In the other countries, the Company has also aimed for providing supply chain management services, which are more value-added, with high returns ratios. The company also renders ground and cargo handling at the Kuwait International Airport and manages malls as a part of this business segment.

In its logistics business, the company has already expanded into many geographies, besides Kuwait, in this segment, viz., Bahrain, the UAE (Dubai), Qatar, Lebanon, Oman, Iraq, Saudi Arabia, Jordan and Turkey.  As a part of PWC's logistics business, it provides logistics services to the armed forces stationed in the Arabian Gulf region for local market-ready items – mostly perishable items. The business from the US armed forces is the main business driver for the company in its logistics business segment. The company was also selected by Defense Logistics Agency (DLA) for providing turnkey supply chain solutions to the US Army, Navy, Marines, and Air Force operating in the Arabian Gulf region. The execution of these contracts leverages PWC’s technology and logistics capabilities. The current Prime Vendor contract (PV-1) ended in the middle of December 2005. Under the contract, subsistence items were supplied by the company to armed forces stationed in Kuwait, Iraq, Bahrain and Qatar. The second Prime Vendor contract (PV-2) is expected to run for five years from December 2005, after the PV-1 lapses, assuming the level of troops in Iraq remain the same. Besides the Prime Vendor contracts, the company has other contracts too in this business segment.

PWC’s customs solutions for customs authorities have been developed around the MicroClear platform. MicroClear is a world-class enterprise solution for the customs' sector on Microsoft's .NET platform. Among PWC’s clients for MicroClear is China Customs, one of the world's largest customs organizations with more than 400 customs locations throughout the country. Another client is the Central Board of Revenue (CBR) of the Government of Pakistan. Besides these, the contract with Kuwait Customs is being executed by the company’s subsidiary Global Clearinghouse Systems (GCS) and is for a 25-year term. The revenues from this contract are expected in 2005, and are likely to rise each subsequent year till 2029. The contract involves developing IT solutions on the MicroClear platform for automating and modernizing the entire customs area at the Kuwait ports and airport and training the personnel to utilize the MicroClear platform.

The company also offers miscellaneous value added services, such as trade finance, e-commerce, consultancy services and equipment supplies to its clients.

Recent Acquisitions
The company has been in the news over the past many months. The company has made major acquisitions in recent months. It has recently acquired Singapore-based Trans-Link Group, US-based Transoceanic Shipping Co., and US-based GeoLogistics Corporation. Through its recent acquisitions, the company has positioned itself to provide integrated logistics services across niche segments in the region. Indeed, the company is transforming itself into a major global logistics player.

Financial Performance in the First Three Quarters of 2005
The company had revenues of KD242.2mn in the first three quarters of 2005, up 146.4% year-on-year. While the rental revenues increased by 66.7% to KD17.5mn, logistics revenues increased by 75.3% to KD147.1mn during the period year-on-year. Operating profit during the period of KD100.5mn was up 44.8% year-on-year. Salaries & employee benefits were up 256.1%, whereas general & administrative expenses were up 200.0% during the period. The company’s net profit during the period of KD115.0mn was up 67.6% year-on-year.

There was an increase in the accounts receivable while the inventories marginally declined at the end of the first three quarters of 2005, in line with the business expansion during the period. While the accounts receivable increased to KD192.6mn, inventories were at KD65.1mn at the end of the period. The average receivable-days increased to 146 days at the end of the period, from 118 days at the end of 2004, while the average inventory-days more than halved to 127 days at the end of the period, from 265 days at the end of 2004. Short-term investments at the end of the first three quarters of 2005 of KD2.8mn were up from KD1.6mn at the end of the year 2004. Investments available for sale of KD1.9mn were marginally up from the end of 2004. Investments in associates stood at KD7.6mn, up from KD0.8mn at the end of 2004. There was a huge increase in investment properties at the end of the first three quarters 2005, standing at KD202.4mn, up 78.4% from the end of 2004. The total assets of the company at KD1.0bn were up 163.4% from the end of 2004.

The accounts payable went up by 77.1% to KD175.3mn at the end of the first three quarters of 2005. The average payable-days declined to 264 days at the end of the period, from 370 days at the end of 2004. Short-term loans stood at KD29.8mn, while the long-term loans stood at KD166.7mn, thanks to the long-term debt raised by the company for its acquisition of GeoLogistics during the period. Bonds worth KD29.4mn were outstanding at the end of the period, up 33.0% from the end of 2004. With this, the company has fully drawn all the tranches of its 2003 bonds issue. The paid-up equity rose to KD69.0mn at the end of the period, thanks to the 45% stock dividend declared for 2004 and a 16.64% rights issue comprising 71 million shares.

Risk Factors
Any adverse developments on the geo-political front in GCC could disturb the future business plans of the company and could have an adverse impact on its future earnings potential. There is a risk of payment defaults and foreign exchange losses to the company from its customs solutions business in future too, thereby, making it provide larger amounts for doubtful debts, going forward. However, these amounts could be insignificant in the context of the overall revenues of the company. The company has a few ongoing legal disputes, which, if settled unfavorably for the company, could impact its profitability going forward.

Valuation & Recommendation
The projections for 2005 have been made based on the financial results for the first three quarters of the year, assuming a continuation of the growth momentum seen during the period. Revenues accruing to the company as a result of its acquisition of the three companies – Trans-Link, Transoceanic and GeoLogistics – have been taken for the appropriate period during the year. From 2006 onwards, revenues for the full year have been assumed to accrue to the company from the above three acquisitions. Revenue streams from all other existing contracts in the logistics segment have been factored into the projections. The operating profit margin is projected to decline every year from 2005 due to freight forwarding costs post the acquisition of GeoLogistics and Transoceanic by the company. The freight forwarding business is known to be a low margin business. Globally, the operating margins in this business are estimated at about 4%. We have, however, projected a gradual tapering of freight forwarding costs in later years, under an assumption of increased synergies among the Group companies.

For the Discounted Cash Flow (DCF) method, a risk-free rate of 6.0% and an equity risk premium of 6.0% have been assumed. Beta, based on the previous 60 months’ returns, is 1.435. The cost of equity derived from the above assumptions using the Capital Asset Pricing Model (CAPM) is 14.6%. The cost of debt has been assumed at 7.0%, in anticipation of a further firming up of interest rates going forward. Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works out to 12.4%. Based on our future earnings projections and the above assumptions for DCF computations, the DCF value of PWC is KD3.660 per share. On the basis of the weighted average P/E of the global major logistics players and PWC's projected 2006 earnings, the company’s stock valuation comes to KD6.418 per share. With a weightage of 80% for the DCF valuation and 20% for the peer valuation, the weighted average share value for the company comes to KD4.211. At this intrinsic value, PWC’s share has an upside of 50.4% over its current market price of KD2.800. The company is also listing on the Dubai Financial Market soon, which should enhance its liquidity further. Therefore, we recommend a 'BUY' on the PWC stock.


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