Wilmar International - On the rebound
- 4Q16 core earnings of US$447m (+70% y-o-y; +16% q-o-q) – slightly below our expectations.
- Sequential recovery driven by Tropical Oils, Sugar, Associates, offset by decline in Oilseeds & Grains.
- FY17F earnings unchanged, FY18F earnings tweaked by 1%.
- HOLD rating and S$3.90 TP maintained.
- China’s decelerating economic growth means that Wilmar is now focused on expanding margins within its product portfolio.
- Over the long term, we expect Wilmar to gradually extend penetration of its well-established brands via its vast distribution networks in Asia’s growing markets.
- We reiterate our HOLD call on the counter.
4Q16 core earnings slightly below.
- Core 4Q16 earnings came in at US$447.4m (+70% y-o-y; +16% q-o-q).
- Both Tropical Oils’ and Oilseeds & Grains’ pretax were slightly below our forecasts, although this was partly offset by better-than-expected contribution from associates.
- We adjusted FY17F Tropical Oils margins slightly higher to 4.5% from 3.8% to account for higher Plantations contribution; but tweaked Oilseeds & Grains pretax margin lower to 2.9% from 3.0% on weaker-than-expected 4Q16 performance.
- FY17F Sugar segment’s pretax margin was also reduced slightly to 2.7% from 2.8% on lower sugar selling prices.
- Reflecting the above, FY17F earnings were unchanged, while FY18F earnings was raised by a marginal 1%.
- We do not anticipate any catalysts that would move the stock significantly higher in the near term. We believe the sequential recovery in 4Q16 earnings has already been priced in.
- With a greater presence in India (through AdaniWilmar’s proposed JV with Ruchi), and gradual penetration of well-established brands – including Goodman Fielder – in China, Wilmar’s FY16-19F earnings are expected to expand at c.8% CAGR (low-base effect).
- We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.90 (WACC 7%, TG 3%) – unchanged.
- Our TP offers no upside from current level (except for 2.4% dividend yield).
Key Risks to Our View
- Wilmar’s share price is influenced by palm oil refining/soybean crushing margins on top of crude palm oil (CPO)/sugar price expectations.
- There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel offtake fails to live up to our expectations (3.7m metric tonnes) 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.