Wilmar International - Focus on margins
- China’s decelerating economic growth means that Wilmar is focused on expanding margins within its product portfolio.
- Over the long term, we expect Wilmar to gradually extend penetration of well-established brands through its vast existing distribution networks in Asia’s growing markets.
- In this report, we reiterate our HOLD call on the counter.
Earnings and TP adjusted slightly.
- Revisions to our CPO/soybean price forecasts and currencies positively impacts Wilmar’s earnings. We adjusted Wilmar’s FY16F/17F/18F net earnings by +6%/+9%/+8%.
- We expect the group’s oilseed crushing subsegment pretax to remain firm in 4Q16 – backed by record US harvests.
- Wilmar’s 4Q16 Tropical Oils segment pretax contribution should likewise sequentially improve on the back of both higher ASP and volume.
- Given delayed harvesting in 3Q16; we also expect part of sugar seasonal pretax peak to spill over into 4Q16.
- We do not anticipate catalysts that would move the stock significantly higher in the near term. We believe the sequential recovery in 3Q16 earnings is already priced in.
- Notwithstanding continued biodiesel allocation in Indonesia; expansion of India presence (through Adani-Wilmar’s proposed JV with Ruchi); and gradual penetration of well-established brands – including that of Goodman Fielder – in China; Wilmar’s FY16F-19F earnings are expected to expand at a c.11% CAGR (low-base effect).
- We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.90 (WACC 7%, TG 3%) – revised up from S$3.39 previously.
Key Risks to Our View:
- Wilmar’s share price is influenced by palm oil refining/soybean crushing margins on top of CPO/sugar price expectations.
- There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year.
- As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our TP.