UOB Kay Hian 2015-08-11: Wilmar International - 2H15 Results; Volume Game. Maintain BUY.

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WILMAR INTERNATIONAL LIMITED F34.SI

Volume Game 

• Wilmar is on track to deliver higher earnings in 2H15 on: 
  1. positive soybean crushing margins and sugar contribution, 
  2. higher sales volumes from downstream palm operations, and 
  3. better consumer product earnings. 
• We trim our earnings estimate by 6% as we were too optimistic earlier on refining volume and sugar margins. 
• However, we are positive on Wilmar as it is a beneficiary of low commodity prices and the recent regulatory changes. 
• Maintain BUY. Target price: S$3.60. 

WHAT’S NEW 

• Key takeaways from briefing point to a better 2H15. Wilmar International’s (Wilmar) management is confident of delivering better earnings in 2H15 (UOBKH estimate: 2H15 accounts for about 60-65% of full-year earnings) to be driven by much higher sales volume with stable or slightly lower PBT margins as the mid-stream processing operations for palm oil, soybean and sugar are currently enjoying lower commodity prices. Overall, sales volume overall will be much higher in 2H15 as sugar sales kicks in, and as Wilmar gears up for higher sales volume from downstream palm processing and consumer packs thanks to the year-end festive demand in China, India and Indonesia. 
• Commodity prices to stay low for now. Chairman and CEO of Wilmar, Mr Kuok Khoon Hong commented that current low commodities prices could persist, as a result of slower consumption growth from largely populated and developing countries, such as China, India, Pakistan, and Africa. Meanwhile, supplies are increasing after years of overinvestment and weather has been favourable this year in most of the key agricultural regions. As for palm oil prices, management attributes the current low prices to the weak soybean oil prices and demand. Demand in China has been stagnant as consumers in China are still not ready to accept palm oil and there is continued weak palm oil demand from the industrial sector (instant noodles and snack producers). 
• Patiently waiting for distressed assets for M&As. Amid the prolonged low commodity prices, more assets are likely to be up for sale. Wilmar is ready to embark on any good assets acquisitions to continue to grow its key competence areas, i.e. its three current core divisions. However, it is still too early to embark on any M&As as its valuation is not at a distressed stage. Wilmar’s most recent and major purchase was a 50% stake in Goodman Fielder with First Pacific. Goodman Fielder’s products are already being sold in the Chinese market via Wilmar’s consumer pack distribution network. 

STOCK IMPACT 

Division Highlights For 2H15 Are: 

• Tropical oils (56% of 2015F PBT): Higher sales volume and marginal improvement in PBT margins. Sales volume was driven by: a) higher processing volume as palm trees entered the high production season, b) the year-end festive demand, and c) higher biodiesel sales following the implementation of the CPO levy. Margins for this division should see slight improvement thanks to the CPO levy which would have also created a price gap of U$20-30/tonne between crude and refined products. Moreover, the new biodiesel formula will cover raw material, processing and transportation costs. On top of that, management also mentioned that it has forward sold its CPO at higher prices. 
• Oilseeds and grains (26% of 2015F PBT): Soybean crushing margin to remain positive and contribution from consumer pack should be better. Management is confident that its soybean crushing margin in China will remain profitable for the rest of 2015 with Wilmar having delivered a good turnaround in 1H15 vs 1H14. Consumer packs will do well from higher volume and better margins from low feedstock prices. 
• Sugar (8% 2015F PBT): Volume game for 2H15 as margins will be lower due to weak pricing. Strong sales volume from its Merchandising & Processing in 1H15 (+37% yoy) is expected to continue into 2H15 while milling volume is likely to be flat. Higher sales volume would be able to compensate for the expected lower PBT margins due to weak sugar prices. Sugar milling is expected to turn profitable in 2015 vs the losses recorded in 2014, thanks to lower cost of operations after management embarked on cost cutting measures and also forward sold some sugar at better prices. 
• At the moment, Wilmar’s sugar associate in India – Shree Renuka, is a small drag on earnings and is likely to take time to breakeven given the oversupply of sugar in Brazil. In 2Q15, its associates’ losses were widened to US$10.3m due mainly to losses from Shree Renuka caused by the difficult operating environments for its sugar business in India and Brazil. 

EARNINGS REVISION/RISK 

• Lower earnings estimates for 2015-17. We have lowered our earnings estimates by 6.2%, 5.6% and 6.0% for 2015, 2016 and 2017 respectively. This is to reflect our adjustment to our assumptions which include: a) lower sales volume for its Tropical Oil Manufacturing to 5-6% from previous 6-10% on lesser biodiesel sales volume for 2015 due to the delay in biodiesel blending in Indonesia and higher competition expected in 2016-17, and b) lower sugar PBT margins with our forecasts trimmed to US$12- 13.70/tonne in 2015-17 from US$17-19/tonne previously as margins were affected by the decline in sugar prices. 
• We are now expecting EPS of 20.1 US cents, 21.9 US cents and 23.7 US cents for 2015, 2016 and 2017 respectively.. 

VALUATION/RECOMMENDATION 

• Maintain BUY with a lower target price of S$3.60 (previously: S$3.65) to reflect the lower earnings estimates. Our target price is derived from SOTP valuation and translates into a blended 2015F PE of 13.3x. Wilmar is a clear beneficiary of the low commodity prices and the Indonesia’s new regulation which favours downstream players. Its earnings are also relatively more resilient in low commodity price environment vs its peers due to its most integrated business model. 
• Declared an interim dividend of S$0.025/share (1H14: S$0.02/share), payable on 26 Aug 15. 

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 utilisation¸ which will deliver sustainable margins.

Singapore Research Team | http://research.uobkayhian.com/ UOB Kay Hian 2015-08-11

BUY Maintain BUY 3.60 Down 3.65