Wilmar - Reversal Of CPO Price Trend Begins
- Maintain NEUTRAL with revised SOP-based TP of SGD3.56 (from SGD3.28, 6% downside).
- We are starting to witness a fall in CPO prices, and believe this marks the start of lower plantation profits. Nevertheless, we believe lower plantation profits would be more than offset by better processing margins, due to lower feedstock costs.
- Unlike most companies, Wilmar is not expecting as high an increase in FFB production as a result of replanting works.
- On the other hand, soybean prices have fallen on expectations of a bumper crop in Brazil – although this remains to be seen, we believe it may pose potential upside for Wilmar’s crush margins.
CPO price on a downtrend since last week.
- Good soybean yields reported in Brazil have begun to drag down CPO prices. We believe the downward pressure on CPO prices would persist as most companies are expecting solid improvements in FFB production this year.
- Wilmar however, would be replanting 10,000ha of its plantation this year, and hence is only expecting 5- 10% increase in production levels.
Lower plantation profits to be more than offset by better processing margins.
- Based on our 2017 house view on CPO price remaining at MYR2,500/tonne (USD564/tonne), we expect plantation profits to come off significantly.
- Nevertheless, we believe this would be more than offset by better processing margins due to lower feedstock costs.
Moderating soybean prices could pose possible upside for Wilmar.
- As we have mentioned in earlier reports, a declining trend in soybean prices is generally positive for Wilmar. With the current bumper crop in Brazil, we believe positive crushing margins can be achieved at Wilmar.
Potentially more investments in joint ventures (JV) and associates.
- Wilmar’s investments in JV and associates performed well in 2016, delivering 35% YoY growth in contributions. The group expects to benefit from the lifting of restrictions on foreign investments in China’s oilseeds and grains processing businesses.
- Given that its adjusted net gearing ratio has come off to 0.35x, we believe the group could gear up to take on more M&As.
Fairly valued at the moment.
- We maintain our NEUTRAL call as we believe the stock is fairly valued after the recent run up in CPO prices. The group expects its 2017 results to be satisfactory.
- We increase our forecasts by 8-10% to reflect the potential upside at the soybean crushing business, as well as higher contributions from associates. This has resulted in a higher SOP-derived TP of SGD3.56, which implies FY17F P/E of 15x.
- Key risks include volatility in oilseeds and sugar earnings, and a slower-than- expected recovery in FFB production.
Agriculture | Plantation Neutral (Maintained)