Wilmar International - DBS Research 2017-02-17: Focus on margins

Wilmar International - DBS Vickers 2017-02-17: Focus on margins WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Focus on margins


Navigating volatility. 

  • 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.


Lacking catalysts. 

  • 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).


Valuation

  • 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.




Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2017-02-17
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.90 Up 3.390



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