Wilmar International - DBS Research 2016-11-11: Strong earnings recovery priced in

Wilmar International - DBS Vickers 2016-11-11: Strong earnings recovery priced in WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Strong earnings recovery priced in

  • 3Q16 core earnings of US$384.9m ahead of our expectations.
  • Sequential recovery driven by Oilseeds & Grains, seasonal Sugar contribution, Shipping & Fertiliser, and Associates.
  • 4Q16 earnings outlook expected to remain favourable.
  • HOLD rating and TP maintained.


What’s New 


3Q16 core earnings ahead of our expectations 

  • Core 3Q16 earnings of US$384.9m (+10% y-o-y against restated US$350.4m) were better than the US$258mUS$291m range we had projected. This brought the group’s core 9M16 earnings to US$387.1m – representing 46%/43% of our/consensus full-year targets.
  • Reported 3Q16 earnings came in at US$392.2m (+47% y-o-y against restated US$267.6m) – which included US$7.4m of gains arising from investment securities; partly offset by FX losses recognised on intercompany loans.

Sequential recovery driven by Oilseeds & Grains, Sugar 

  • Oilseeds & Grains delivered strong pretax of US$248.1m (+2% y-o-y) – against US$125.4m expected. We suspect a drop in soybean origination costs had boosted crushing margins; while Consumer products’ margins may have stayed relatively strong. This was partly offset by lower-than-expected US$169.3m pretax from Tropical Oils (+61% y-o-y) – against US$204m forecast. 
  • While the group credited downstream business’s good performance, we suspect refining sub-segment may have lagged our expectations.
  • Plantations sub-segment FFB yields (-18% y-o-y) were still adversely affected by El Nino; although we understand higher ASP worked to partly compensate the impact.
  • Sugar segment also reported better-than-expected seasonal pretax recovery to US$86.4m (-21% y-o-y) – vis- à-vis US$46.1m forecast – thanks to sequential recovery in prices.
  • 3Q16 results were further boosted by strong pretax from other segment (i.e. shipping and fertiliser), which delivered US$35.2m – against US$12.1m expected.

Margins: higher for Tropical Oils and Oilseeds & Grains 

  • Tropical Oils pretax margin/MT came in at US$29 (+73% y-o-y) – against our FY forecast of US$32. This was on the back of improved contribution from downstream operations. Wilmar’s announced biodiesel allocation for November 2016 through April 2017 amounted to 587k kl – representing a slight decline from 667k kl in the previous six months due to increased number of producers.
  • Oilseeds & Grains pretax margin/MT for the quarter was booked at US$31 (+3% y-o-y) – against our estimate of US$17.

Investment gains, strong Associates contribution 

  • Boosting the improved operating results, Wilmar booked a 94% y-o-y jump in share of results from associates and JV, mainly on account of strong contributions from associates in China, Africa and Ukraine.
  • In non-operating items, Wilmar also recognised US$7.4m of net gains primarily from investment securities, partly offset by FX losses recognised on inter-company loans.
  • Interest income also dropped 67% y-o-y on lower deposits placed and corresponding borrowings.

Lower gearing ratio 

  • Ending cash & cash equivalents remained sequentially stable at US$3.8bn (-41% y-o-y). Gross debts had dropped 26% q-o-q (flat y-o-y) to US$15.9bn. Stripping out liquid working capital, this translates to reported net gearing ratio of 39% (79% including liquid working capital) – down from 46% in the previous quarter.
  • Cash flow from operations amounted to US$543m for the quarter – higher than reported net profit, due largely to increase in payables; offset by liquidation of inventory and receivables. 3Q16 capex amounted to US$180m vs. US$226m in the previous quarter.


Outlook 


Crush margins expected to remain favourable in 4Q16 

  • Given the continued drop in soybean origination costs in 3Q16, we expect the group’s oilseed crushing subsegment pretax to remain firm in 4Q16 – backed by record US harvests. Yet, slow farmer selling might increase origination cost from South America in 1Q17.
  • We expect Wilmar’s 4Q16 Tropical Oils segment pretax contribution to also improve on the back of both higher ASP and volume.


Valuation 

  • We are maintaining our forecasts as well as our fair value estimate of S$3.39. We do not expect any significant near-term upside catalyst that would propel the counter’s valuation well above our TP. 
  • Maintain HOLD.




Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-11-11
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.390 Same 3.390




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