Wilmar - Positives And Negatives From Bumper Soybean Crops
- We think CPO prices would continue moving downhill from hereon with the recovery in supply and lacklustre demand from China and India. South America is also expecting a bumper crop of soybeans from April onwards.
- As such, we believe Wilmar’s tropical oil segment to be negatively impacted from lower plantations earnings in FY17F. This would however be mitigated by stronger margins in its soybean crushing business as a result of lower input prices.
- We maintain our NEUTRAL recommendation but with a higher TP of SGD3.62 (from SGD3.56, 1% upside).
Positive for soybean crush margins.
- South America is expecting another bumper crop of soybeans. This month, US Department of Agriculture (USDA raised its projection on Brazil’s soybean crop by 4m tonnes to 108m tonnes on higher production expectation, while Argentina is seeing very positive yield results on its early harvest.
- Soybean prices have come down from the highs of USD10.80/bushel in January to USD9.90/bushel currently. We believe this should translate to higher soybean crushing margin for Wilmar International (Wilmar) and should be visible in its 1Q17 results.
Downhill for CPO prices.
- CPO prices have moderated from its highs of MYR3,300/tonne in January to MYR2,900/tonne currently. While the price gap between CPO and soybean oil prices widened back to around USD60/tonne currently (from USD13/tonne in February), the price premium between soybean oil and CPO is still far from historical averages of USD100-150/tonne.
- We believe there is still room for this premium to widen given the supply recovery in CPO as well as a lacklustre demand from China and India.
- We lifted our 2017 in-house CPO price assumption to USD584/tonne (from USD564/tonne) to reflect higher prices realised in the first two months of the year.
- We also changed our price assumption in FY18F to USD565/tonne (from: USD564/tonne) to account for our expectation that prices would continue to be weak, while factoring in our latest in-house exchange rate assumptions.
- We also increased our soybean crush margin assumption to USD10/tonne (from USD7/tonne) for FY17F on lower input cost. With that, our earnings forecast increased by 7.8% for FY17, 1% for FY18 and 3% for FY19.
Maintain NEUTRAL with higher TP of SGD3.62.
- We now peg the plantations business to 17x FY17F P/E (from 23x) as we believe valuations would moderate as CPO prices fall, and as the share prices of the big-cap liquid stocks have benefitted more from the recent rise in CPO price movement, the reverse would also be true in a downward trend environment. This is however offset by an improved outlook for the soybean business.
- All in, we raised our SOP-based TP by 2% to SGD3.62 (from: SGD3.56).
- Upside risks to our forecast include a significant restocking of CPO from India and China, stronger biodiesel mandates from Indonesia.
- Downside risks to our forecast include weather changes and significant logistical problems with Brazil soybean exports that may result in volatility in soybean prices.