UOB Kay Hian Research 2015-07-27: Wilmar International - 2Q15 Results Preview: Boring Quarter; To Catch Up In 2H15. Maintain BUY.

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2Q15 Results Preview: Boring Quarter; To Catch Up In 2H15 

• Wilmar’s 2Q15 net core profit is likely to be US$230m-260m, slightly lower or flat qoq but up 45-60% yoy, driven by the China operation as soybean crushing margins were better yoy. 
• 2Q is a weak quarter for the consumer pack business post Chinese New Year and before the pick-up from festive demand in 2H. 
• Palm refining should do better on volumes but not margins, while upstream remains challenging for both palm and sugar. 
• Maintain BUY. Target price: S$3.65. 

WHAT’S NEW 

• Expect unexciting 2Q results. 

• Wilmar is scheduled to announce 2Q15 results on 5 August after market close. 
• We expect core net profit of US$230m-260m (2Q14: US$163m; 1Q15: US$263.3m). 
• 1H15 net profit is expected to contribute about one-third of our full-year forecast of US$1.37b. 
• 2Q is a seasonally quieter quarter post Chinese New Year and as sugar crushing has yet to start contribution. 
1. Better yoy performance from: 
   1. better soybean crushing margins,
   2. better palm refining margins and sales volume, and
   3. consumer products should deliver better margins on cheaper raw material prices and higher sales volume.
2. Relatively flattish qoq as a pick-up in the tropical oils division will be offset by weaker oilseed and grains performance as the consumer pack business is in its low season post Chinese New Year demand. The sugar division is also under margin pressure due to low prices and sugar crushing has a slow start towards end-May.  

• Oilseed and grains: 

• Improving crushing margin and increase in sales volume. Industry data showing higher soybean import volumes and better crushing margins is positive to Wilmar, which generates about 25% of pre-tax profit (PBT) from this segment. 
• Within this division, the crushing business should see good improvement while consumer pack is in its low season. 
• The high soybean import volume to China should translate into higher crushing volume for Wilmar in 2Q-3Q15. 
• The positive crushing margin in 1Q15 should continue into 2Q15, leading to a significant yoy improvement (2Q14: only US$0.7/tonne).

STOCK IMPACT 

• Tropical oils: Higher sales volume to mitigate impact from weaker margins. 

• Volume for this division is expected to be higher as upstream production picks up after the low season in 1Q and on higher refining volume as well. 
• Pre-tax margin should improve marginally as CPO prices gapped down after the announcement of Indonesia’s export levy. 

• Sugar: Production affected by weather; merchandising volume still strong. 

• Sugar performance this year is highly dependent on sugar merchandising & processing as the sugar milling business is affected by both lower sugar prices and potentially lower production volume for 2015. 
• Sugar production in Australia for 2015 is likely to be lower than in 2014 as the weather has not been good in Queensland. 
• The start of the sugar cane harvesting was relatively slower than last year’s due to wet weather. 
• The weak milling contribution could be partially offset by higher sugar merchandising volume. 
• The sugar division contributed 8.7% of group PBT in 2014 and we are expecting this share to increase to 11% in 2015, largely on higher contribution from its sugar merchandising & processing operation. 

• Expecting a better 2H15. 

• Two-thirds of Wilmar’s 2015 net profit should come in 2H15 as sugar crushing PBT contribution should peak in 3Q15 as the crushing season has started at end-May and will end in October-November. 
• Palm production also peaks in 3Q. Biodiesel usage in Indonesia should start implementing its export levy. 
• As the largest and most cost-efficient palm biodiesel producer in Indonesia, Wilmar will benefit from the new biodiesel pricing, which was fixed at CPO + US$125/tonne. 

EARNINGS REVISION/RISK 

• No change to our earnings forecasts. 
• Earnings risk comes mainly from its soybean crushing business in China, which is now relatively more stable. 
• Any upside to our earnings forecasts will come from better margins from crushing and palm refining. 

VALUATION/RECOMMENDATION 

• Maintain BUY and target price of S$3.65, derived from SOTP valuation and translates into a blended 2015F PE of 12.6x. 
• Wilmar is a clear beneficiary of low commodity prices and the new Indonesian regulation, which favours downstream players. 

SHARE PRICE CATALYST 

• Sustainable earnings stability will rebuild investors’ confidence in Wilmar and they will then invest for its long-term growth. 
• A strong turning point in the Chinese soybean crushing market brought about by increased utilization, which will deliver sustainable margins. 

(Singapore Research Team)

Source: http://research.uobkayhian.com/