The in-depth analysis on $Cogent(KJ9.SI)
This column is jointly written by @fayewang, @gordon_ong and @J_Chou
-Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning from the market.
-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
-Jay has an interest in global macro trends, financial markets and equity research and enjoys applying a combination of the three in his investments. His eventual investing goal is to manage a risk parity portfolio and achieve true financial freedom.
31 May - Establishment Of Cogent Chemical Logistics Pte Ltd Subsidiary, To Provide Value- Added Logistics Providers And General Warehousing. Paid-Up Share Capital = $30,000.
12 May - FY17 Q1 Results
11 Apr - AGM
11 Apr - FY 16 Annual Report
7 Apr - Corporate Updates: 1. Container Depot On Jurong Island Is Completed And Fully Operational 2. Gantry Crane System At Cogent 1 Logistics Hub’s Sky Depot Is Completed And Fully Operational 3. Phase 2 Of Warehouse In Port Klang Free Zone Is Completed And Will Be Fully Leased To A Single Tenant For 3 Years
27 Feb - Cogent Awarded 2.5 Ha Land In Jurong Island To Build Full-Fledged
Cogent Holdings Limited, an investment holding company, provides logistics management services in Singapore. It operates through Transportation Management Services, Container Depot Management Services, Automotive Logistics Management Services, and Warehousing and Property Management Services segments. The company operates a fleet of approximately 100 prime movers 400 trailers; and manages and operates approximately 3.8 million square feet of storage space. Cogent Holdings is 79.78% owned by the Tan family.
Statistics source: Cogent Holdings FY16 Annual Report
The Transportation Management Services segment offers laden and empty containers, dangerous goods, project cargoes, break-bulk cargoes, out of gauge cargoes, port clearance, police escort coordination, freight-coordination, and dry hubbing services, as well as warehouse management and heavy lifting services. Cogent’s customer base is local and international corporations in the steel, construction, marine, and OPEC industries, as well as third party logistics service providers. In 2016, Cogent’s transport team handled approximately 79,000 TEUs of containers and made close to 5,000 trips.
The Container Depot Management Services segment offers storage, handling, washing, and repair of empty containers. Cogent also has a dedicated fleet of trucks to transport empty containers, and adopt Electronic Data Interchange (EDI) for information flow. Taking into account the recently awarded land plots in Jurong Island and Tuas South, Cogent will have a combined container storage capacity of approximately 30,000 TEUs in Singapore.
The Automotive Logistics Management Services segment processes, transports, and stores motor vehicles. Cogent has 5 storage facilities across the island with the capacity to store up to 3,000 cars. Cogent has developed strong working relationships with various government agencies.
The Warehousing and Property Management segment rents warehouses; and provides warehousing services, such as packing, drumming, and other ancillary services, as well as offers property management services. Cogent manages and operates approximately 3.8 million square feet of warehousing and commercial property spaces, notably including The Grandstand. Warehouse and Property Management form 42% of Cogent’s revenue and 53% of operating profit.
Cogent 1. Logistics Hub is an integrated warehouse with a sky depot. The hub is capable of supporting a full suite of logistics services encompassing transportation, warehousing and container depot within a single facility. By integrating warehouse and container depot in a single building, the transport cycle and waiting time are shortened for Cogent’s customers (see image). The strategic location of Cogent 1 means that it is close to both the current Jurong Island as well as the future Tuas Mega Port. High volume of deliveries can be made simultaneously within minutes. Cogent has also been awarded with a long-term land lease to operate a similar multi-purpose logistics hub concept that is designed to support manufacturing operations on Jurong Island.
Current Demand & Supply for Service
- Overall oversupply of warehouse storage space for Singapore market. Introduction of new warehouse space in 2017 and tapering demands due to lacklustre container throughput through Singapore
+ However, growing demand for one-stop logistics (transportation, loading/unloading, warehouse storage and container storage) near Jurong Island. Initial revenue numbers and storage occupancy in newly built Cogent 1. Logistics Hub are positive indicators.
+ Future JICD will be the only container depot located at Jurong Island, thus monopolising demand.
- However, might self-cannibalise demand for Cogent 1. Logistics Hub services which is also coming from Jurong Island.
+ Recently increased demand for container storage and repair from Malaysia, especially at Port Klang where Cogent is operating. Port Klang has seen 10.8% increase in container throughput in 2016. Cogent’s diversification into Malaysia reduces its geographical concentration risks if OBOR creates changes in maritime trade routes.
+ Recently increased demand for vehicle storage and transportation services from O&G, manufacturing and shipping players in Singapore
The container depot Jurong Island is now fully operational and has already translated into stronger revenue growth for Cogent’s Container Depot Management Services in 1Q17, with the company announcing an impressive 42% growth from 1Q16. The growth was also partly attributed to increase in demand at their depot in Port Klang, Malaysia.
Looking forward, the most exciting development will be on the Jurong Island Chemical Logistics Facility project, which is expected to be complete in 2018. Jurong Island has long faced an issue of strong demand and short supply of logistics services. Hence, with the island’s chemical cluster output estimated at around S$100 billion, the outlook seems rosy as the lack of competition due to high barrier of entry would likely translate into significant revenue growth for their Warehousing and property management segment upon operation of the facility.
Important Stock Information
Data source: Capital IQ & ShareInvestor
For Cogent, the company has decreasing P/E in recent years and seems to keep the downtrend in the near future according to Capital IQ. Congent’s lower P/E ratio than the industrial average indicates it has been undervalued. At the same time, Cogent delivered its shareholders increasing earning per share over five years.
Cogent’s revenue has been increasing steadily since 2014, with all measures of operating performance seeing improvements. Significantly, EBITDA has jumped from S$36.4 million in 2014 to S$50 million in 2016 (CAGR of 17%) with EBITDA margin improving from 30.7% to 36.6%, signifying management’s successful strategy of innovation-led growth.
Graphs from: Cogent Holdings FY16 Annual Report
On the back of overall revenue growth across all operating segments and increased operational efficiency, net income has consequently improved year on year, from 24.7M in FY14 to 32.1M in FY16 with CAGR of 14.1%.
Cash Flow Position
Cogent has consistently generated free cash flow since FY14, with current cash holdings at S$61.2M. However, increase in FCF of 12.7M in FY16 could be partly attributed to no dividend payment made for that year due to prudence. Investing cash flow looks to be increasingly negative over the next two to three financial years mostly due to expenditure on Jurong Islands Logistics Facility.
Cogent has 4 main segments with the largest being Warehousing and property management services accounting for 43% of total revenue. Year on year growth in this segment is 9% largely led by increase in capacity from Cogent 1 Integrated Logistics Hub. Container depot management services grew the most at 15%, attributed to increase in volume for container repairs and storage in both Singapore and Malaysia. Tailwind include the development of the chemical logistics facility coupled with high cargo throughput growth at Port Klang. However, global uncertainty on trade and commodities may signify headwind. Automotive logistics management services increased by 12% due to increased demand for such services. Positive demand outlook as Cogent announced 2.5M contract from LTA in April 2017 and a 2.1M contract from Ministry of Home Affairs in Oct 2016. Transportation management services decreased by 6% as a result of downturn in the oil and gas sector, resulting in less trucking services demanded. With uncertainty in the oil and gas sector, downward trend may continue.
According to the chart, SingPost may not be considered as an appropriate peer company for comparison due to its exceptional market capitalisation as the significant difference of market scale may lead to biased result. Therefore, GKE, Poh Tiong Choon, Keppel T&T and CWT will be chose as peer companies of Cogent. Similar to Cogent, GKE and Poh Tiong Choon can be considered as other two pure logistics players in Singapore market. However, Keppel T&T is also involved in businesses such as communication and investment; CWT group engages in multi-segments, namely logistics services, commodity marketing, financial services and engineering services.
From the perspective of pretax margin and net margin, Keppel T&T observed the highest number among the five companies based on the data of financial year 2016. The reason of Keppel T&T’s extraordinary high margin is the $61 million profit contributed by its associated companies and joint ventures. Keppel T&T should has shared similar number of margin (26.8% net margin) if exclude the contribution of associated companies. Apart from Keppel T&T, Cogent delivered the most favourable performance among the rest four companies with 27.904% pretax margin and 23.351% net profit margin. By using the indicators of ROA and ROE, we found Cogent is at an advantageous position among its peers. In a nutshell, Cogent is the leading company in the field of logistic gauged by profitability, and still maintain comparative advantages in the competition with multi-segment players.
b.Liquidity and Leverage
Cogent is the company with both highest current ratio and highest cash ratio when compared to GKE, Poh Tiong Choon, Keppel T&T and CWT. PTC holds similar level of leverage as Cogent, but its current and cash ratio are much lower than that of Cogent. CWT is another company that possess low level of cash in hands, and the company has the highest leverage among the five companies. The industrial average leverage level is 0.55, thus all the companies use heavier leverage compared to that. Keppel T&T, which is similar to cogent, has higher current and cash ratio than leverage. It means that Cogent and Keppel T&T currently have more liquid operation and bear lower business risk. According to Cogent’s 1Q17 result, amount of cash held by the company $60.38 million.
As unannounced CAPEX for the JCILF will represent a significant change in Cogent’s capital structure, DCF valuation will not be suitable here.
Comparables Enterprise Value EV/EBITDA P/E
Poh Tiong Choon 363.6M 12.3 22.8
Keppel T&T 1,448.1M 10.59 16.59
SingPost 2,965.7M 14.9 24.32
CWT Holdings 1,356.7M 13.59 16.9
Cogent 441.9M 8.8 11.32
Mean 12.036 18.386
*Data from Capital IQ Database
Instead, we shall do a simple comparables analysis by looking at EV/EBITDA multiple (2017E). Upon first glance we can see that Cogent’s forward P/E and EV/EBITDA multiples are much lower than its peers. Taking the average of the main industry players we arrive at a EV/EBITDA multiple of 12.036 for the industry. Cogent’s EBITDA for 2017E is 53.7M, hence arriving at an enterprise value of 646.33M. Net debt holdings currently stands at 63.9.M, and if we expect this position to increase by 38M, 63M or 88M assuming cash will be up by around 12M with no dividend in FY17 as per FY16 and Cogent finances JCILF at different levels of debt+cash of 50M, 75M or 100M, we will arrive at a fair price valuation of $1.137, $1.086 and $1.033 respectively, an upside of 30-40%. Though note that the significant increase in financial risk given that gearing will likely become higher than 100% will pose greater equity risk. Regardless, at its current price of $0.790 Cogent looks attractive.
Faye: Cogent managed to maintain its steady growth of both its revenue and profit over the past five years, its over 20% profit margin and ROE indicates great potential growth of the company. After the success of Cogent 1 Logistic Hub, Cogent adhered to their strategy of constructing integrated logistics/warehouse hub, and launched the plan of the Jurong Island Chemical Logistics Facility, which is likely to result more than $100 million expenditure. The company currently holds $61.2M of cash, and possesses a leverage of 0.93, ranked as the second highest among its peer companies. Though the liquidity ratios indicate that Cogent maintains a liquid balance sheet now, increasing amount of cash used in both investing and financing due to increased lease payment in FY17 could lead to deteriorated liquidity and solvency, which should be considered as a concern. Various measures have been taken to deal with greater debt pressure, for instance, the company didn’t pay dividend in FY16 and seems to remain this policy in FY17. Thus, it may not be a wise option for investors, especially for dividend investors, to plunge capital in Cogent’s stocks at current stage.
Gordon: What I like about the company is their innovative solution (integrated logistic hub with a rooftop container depot) to capture demand amidst a challenging macro environment. The success of this concept is evident as competitors such as JTC and CWT are also building their own integrated logistic hubs. Moreover, Cogent has diversified into Port Klang to reduce exposure to Singapore’s waning container volumes. Decent normalised trailing P/E at 11.8x, high net profit margin at 23.2% and high ROE at 20%+ fuelled by debt. Highly levered logistics company with 93.1% D/E, set to climb even higher with building of new chemical logistics hub at Jurong Island. Cash also strapped due to equity-financed expansion plans in Port Klang, evident as management decide to pay no dividends for FY16. Risks include rising interest environment, cyclical demand for logistics, long-term structural factors affecting demand for logistics in Singapore, and price competition from Singapore-based competitors that are experiencing a supply glut of warehouse space. Downside may be significant if risks simultaneously materialise while the Jurong Island hub is still under construction (and not generating revenue).
Jay: Cogent’s management has shown great ambition in the past five years, with improving turnovers and profit margins a direct result of management’s successful implementation of innovation-led growth (exemplified by Cogent 1 Logistics Hub, the world’s first integrated logistics hub) and focus on niche areas with less competitors such as providing logistic services for chemicals (exemplified by development of Jurong Island Chemical Logistics Facility).
However, there is an elephant in the room for the stock in the form of cost required for the development of JICLF. Currently, Cogent has happily reported that it has secured the contract for JICLF but not the capital expenditure or method of financing this project. Decision by management for no dividend payment for FY16 due to prudence should be a red flag for investors. As it stands, cash holdings for the company is at S$61.2M and total debt/equity is at 93.0%, above industrial mean of 58.0%. If we estimate CAPEX for the project to be in the region of Cogent 1 Logistics Hub which costed around S$150M, then a weaker balance sheet and cash flow statement and the prospect of no dividend payment for the next one to two years is a strong possibility. With current cash holding not able to cover, it is highly likely majority of the project will be financed through a mixture of debt and equity. Considering that the market has more or less priced in the growth potential from Cogent 1 Logistics Hub since its opening a year ago hence limited upside, regardless of the final capital structure the potential of increase in gearing level or the dilution of shares would represent a net negative for shareholders for the next one to two years. The project also signifies that Cogent will become even more dependent on the oil and gas industry, hence increasing global trade uncertainty represents a strong headwind that will impact the expected value of the project.
Looking at the current situation upside is limited yet downside is significant, hence I would recommend waiting for Cogent management to announce how they will finance JICLF and navigate through FY17 and FY18 before making a move in the market, but if investors could stomach the risk and tide through the headwinds then they should be able to reap significant benefits after completion of JICLF project in FY18.
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*All data are taken from Financial Statements and cross-checked with S&P Capital IQ unless otherwise credited.
**Numbers are in SGD’mm (foreign currencies are automatically converted through S&P Capital IQ) unless otherwise stated