Wilmar International (WIL SP) - 1Q17 Strong Results On Better Performance From Oilseeds And Grains
- Wilmar’s 1Q17 core net profit of US$313m was above expectations on stronger-than-expected soybean crushed volume and margins, and better associates’ performance.
- We maintain our earnings forecasts but expect weaker soybean crushing margins in 2Q17.
- Management made a surprise announcement to restructure its China operations with the possibility of a separate listing.
- Maintain HOLD. Target price: S$3.50. Entry price: S$3.20.
Results above expectations.
- Wilmar International (Wilmar) reported 1Q17 core net core profit of US$313m (-47.0% qoq, +40.5% yoy), coming in above our expectation of US$230m-270m. The variance is mainly due to stronger-than-expected soybean crushed volume and margins, higher contributions from China associates and no losses from its sugar associate in India.
- The higher net profit (unadjusted) of US$362m in 1Q17 was mainly attributed to gains from investment securities due to improved conditions in the equities markets.
- Share price could react positively to the potential listing of Wilmar’s China operation, which is likely to command a higher PE valuation (average of 20-25x 17F PE) vs Wilmar’s current 12x 2017F PE.
Tropical Oils: Better yoy on higher production and better CPO prices.
- Segment performance came in within expectation, where PBT decreased marginally qoq due to weaker production on seasonality.
- Meanwhile, PBT registered a strong yoy growth, supported by better performances from the refinery (better margins on higher utilisation) and upstream businesses, with the latter benefitting from higher CPO prices and FFB production.
Oilseeds & Grains: Stronger-than-expected soybean crushed volume and crushing margins.
- The division posted stronger-than-expected results. PBT increased 20.1% qoq, mainly supported by higher soybean crushed volume and better crushing margins despite weaker consumer products’ sales volume. PBT margin improved to 4.8% in 1Q17 (4Q16: 3.9%. 1Q16: 3.8%).
- Soybean crushing margins are expected to be capped by massive soybean imports into China in the coming months.
- Meanwhile, sales volume for consumer products is expected to recover in 2Q17 on the seasonal reduction in 1Q17, which will provide stable earnings to the group.
Sugar: Seasonal loss.
- Segment performance was within expectation, with a pre-tax loss of US$35m (1Q16: Pre-tax loss of US$18m).
- The weaker yoy earnings were mainly due to higher operating costs despite higher sales volume (+27.3% yoy) which led to higher revenue (+60.5% yoy). We expect this division to continue showing a steady performance in 2017, supported by stable sales volume in the merchandising & processing segment.
Potential separate listing of China operations.
- Wilmar is restructuring its China operations (soybean crushing, consumer packs, flour and rice) with the possibility of a separate listing. However, the proposed listing is still at an evaluation stage.
- Our current SOTP-based target price is pegging the China operations (oilseeds & grains) at 15x 2017F PE vs an average of 29x 2017F PE trading PE for Tingyi (322 HK) and UniPresident (220 HK). Assuming the listing is at 20x 2017F PE and 25x 2017F PE, the potential enhancement to our target price will be S$0.35-0.40 and S$0.70-0.75 respectively.
- Back in mid-09, Wilmar also made an announcement to evaluate the feasibility of listing its China operations on the Shanghai or Hong Kong Stock Exchange. However, the plan was put on hold given the weak market sentiment then.
- No change to our earnings forecasts. We maintain our EPS forecasts of 20.6 US cents, 21.6 US cents and 22.7 US cents for 2017-19 respectively.
- We are maintaining our earnings forecasts as:
- we expect a weaker contribution from the oilseeds and grains business in 2Q17 on potential weaker soybean crushing margins, and
- awaiting the outlook guidance from management at the results briefing.
- Maintain HOLD and SOTP-based target price of S$3.50. This translates into 12.1x blended 2017F PE, which is close to its 5-year mean (1-year forward PE of 12.5x). Entry price is S$3.20.
SHARE PRICE CATALYST
- Stronger-than-expected earnings growth.
- Weather-induced commodity price hikes.
- Full implementation of the biodiesel mandates globally could lead to better demand for biodiesel (Wilmar is the world’s largest palm biodiesel producer).