DBS Group Research 2015-07-27: Wilmar International - ​Steadying the ship. Maintain BUY.

STEADYING THE SHIP 


Navigating volatility. 

  • China’s decelerating economic growth means that Wilmar is focused on expanding margins within its product portfolio. 
  • Being one of the largest integrated Agribusiness companies, Wilmar should benefit from stable commodity prices, diversified business model and risk management. 
  • Over the long term, we expect Wilmar to gradually extend penetration of well-established brands through its vast existing distribution networks. 

Forecasts tweaked 0-1% on changes in segment reporting. 

  • We adjusted our forecasts slightly to impute changes in Wilmar’s segment reporting this year. 
  • Based on our revised estimates, we expect 2Q15 earnings to come in between US$250m and US$272m (+53-67% y-o-y). This is driven by continued strength in soybean crush margins, offset by sequential weakness in palm oil prices and refining margins. 
  • Sugar segment is expected to report seasonal loss – though smaller than 1Q15. 


Key beneficiary of Indonesia’s B15 programme. 

  • Starting 16 Jul15, Indonesia began charging levies for exports of various palm oil products with differentiated rates. 
  • The consequential drop in domestic prices translates into lower feedstock prices for Wilmar – which buys most of its CPO requirements. 
  • Equipped with the largest biodiesel capacity in Indonesia, Wilmar should likewise produce biodiesel profitably with subsidies collected from export levies. 
  • With reduced participation of financial traders, we believe the catalyst for Wilmar lies in stronger prospective 2H15 earnings. 


Valuation: 


  • We employed DCF methodology (WACC 6.2%, TG 3%) to arrive at our TP of S$4.05 for Wilmar (unchanged). 
  • Our BUY call is reiterated for 26% upside
  • We believe reduced volatility and steady growth in prospective earnings should move Wilmar’s forward PE closer to its average of 15.1x from 12.9x currently (close to -1SD). 


Key Risks to Our View: 


  • Our call is premised on continued implementation of Indonesia’s B15 policy. Changes or delays to this policy would affect our estimates. 
  • As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our price target.


(Ben SANTOSO)

Source: http://www.dbsvickers.com/



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