When we initiated coverage on Cogent Holdings Ltd (Cogent) in December 2014, we had identified the Cogent 1.Logistics Hub as the next pillar of growth for Cogent. Since then, Cogent has reported 24% and 36% year-on-year (yoy) growth in net income for FY14 and FY15, respectively. The stock has since appreciated 123% from its then-price of 37 cents. With this latest announcement, we find it apt to again say, “The next pillar of growth”.
What is the news?
Cogent announced that its wholly-owned subsidiary, Cogent Jurong Island Pte Ltd (CJI), has received a letter of offer from JTC Corporation (JTC) dated 6 September for Phase One of the construction of the Jurong Island Chemical Logistics Facility. Cogent had accepted the letter on 8 September.
Phase One will occupy 3.5 hectares of land with approximately 87,500 sqm of built-up area. CJI will have to submit its application to develop Phase Two of the site. The submission has to be made within four years from the start of operations of Phase One. Phase Two will be on an additional 2.5 hectares plot of land of approximately 62,500 sqm of built-up area.
JTC will grant CJI a Licence to develop Phase One of the facility. The Licence will commence on 1 April 2017 and will be valid for three years.
How do we view this?
We highlight that Cogent still has to go through several approval processes with various relevant governmental and statutory authorities before the project can commence. Moreover, Cogent will also have to accept the terms and conditions set out for the project.
The licence to develop Phase One of the facility will commence on 1 April 2017. We assume that the design process and preparatory work will last for the remainder of 2017, with actual construction commencing in 2HFY17. Using the construction of Cogent 1. Logistics Hub as a guide, we assume a development cost of c.S$90mn and construction of Phase One to last for five quarters. Based on our assumed timeline, Phase One could receive its Temporary Occupation Permit (TOP) in 1HFY19.
The existing Cogent 1.Logistics Hub has a gross floor area (GFA) of c.149,000 sqm; Phase One and Phase Two of the Jurong Island Chemical Logistics Facility combined will be just as large. There should be a material impact to earnings.
We see the possibility of Cogent funding the project through internal resources, without having to raise debt. Our forecast is that Cogent will generate net cash from operations that is in excess of S$40mn for the next three years. Cash balance should reach about S$70mn at the end of FY17.
Upgrade to “Buy” rating with new higher DDM-backed target price of S$1.11
Key de-rating event and risk to our price target is the project being called off. The target price gives an implied forward P/E multiple of 15.3x over NTM 7.13 cents EPS.