UOB Kay Hian 2015-08-06: Wilmar International - 2Q15: Seasonally Weak Quarter. Maintain BUY.

WILMAR INTERNATIONAL LIMITED F34.SI

2Q15: Seasonally Weak Quarter

Wilmar reported a core net profit US$194m in 2Q15, lower than our expectation of at least US$230m due to weaker-than-expected performances from:
1. the tropical oils division on weaker sales volume, and
2. the oilseeds and grains division on low margins.
1H15 net profit is one-third of our and 36% of consensus full-year net profit forecasts, but this is the norm for Wilmar as sugar operations usually turn profitable in the second half of the year.
Maintain BUY. Target price: S$3.65.

Wilmar reported 2Q15 core net profit of US$194m (-26.5% qoq, +18.7% yoy) and 1H15 core net profit of US$457m (+21% yoy). 2Q15 net profit came in below our expectation of at least US$230m due to:
1. Weak contribution from tropical oils division (56% of 1H15 PBT). This was mainly due to flat sales volume in 2Q15 vs our expectation of a growth. Pre-tax margin from this division improved yoy and qoq to 4.5% (2Q14: 3.9%, 1Q15: 3.9%), likely to come from better refining margins as guided by management during the previous briefing.
2. Lower-than-expected pre-tax margin in oilseeds and grains division (48% of 1H15 PBT). The slight disappointment could be due to our high expectation on consumer margins. Despite the miss, this division made a strong turnaround vs 1H14, which was affected by very low crushing margins.
Sales volume were up in 2Q15 (+8.7% qoq, +14.4% yoy) with a lower margin of US$16.8/tonne (-35.8% qoq, + 144.2% yoy). We think the low margin came mainly from consumer products as more discount/offers were given to encourage sales during the low season.
Wilmar declared an interim dividend of S$0.025/share (1H14: S$0.02), payable on 26 Aug 15.

FFB production grew 20.3% qoq (+2.7% yoy) in 2Q15 on FFB yield improving to 5.5 tonnes/ha (2Q14: 5.3 tonnes/ha), attributable to larger young mature areas (50.7% of total planted vs 45.7% as at end-Dec 14).
Oil extraction rate (OER) for 2Q15 was lower at 20.3% (2Q14: 20.4%) due to higher intake of third-party FFB. For 1H15, total FFB production was still down 3% yoy due to a higher base in 1Q14 as the high crops pattern shifted back in late-13 into 1Q14.
Revenue contribution decreased 26.5% yoy in 2Q15 (1H15: -23% yoy) due to lower CPO prices.

The loss in 2Q15 was narrower qoq as the crushing season has started and there were much higher sales volume from merchandising & processing.
2Q15 and 1H15 losses were wider yoy as margins were affected by lower sugar prices.
Sales volume for sugar merchandising & processing posted very strong growth of 45.8% yoy and 14.8% qoq in 2Q15 (1H15: +37.2% yoy).
Contribution from the sugar division usually comes in 2H when harvesting activities start. However, this year’s performance will be highly dependent on sugar merchandising & processing as the sugar milling business is affected by both lower sugar prices and potentially lower production volume in 2015 due to the unfavourable weather in Queensland, Australia.

Associates recorded a US$10.3m loss (1Q15: US$39.2m profit; 2Q14: US$4.0m loss), mainly due to losses from sugar operation in India and partially offset by higher contributions from associates in China.
However, its others division recorded pre-tax profit of US$31.9m in 2Q15 (+45.9% qoq, +83.9% yoy) on stronger contributions from both shipping and fertiliser businesses and higher investment gains.

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.

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 utilisation¸ which will deliver sustainable margins.

Chan Yuan She | http://research.uobkayhian.com/ UOB Kay Hian 2015-08-06

BUY Maintain BUY 3.65 Same 3.65