Wilmar International - DBS Research 2015-11-12: Weighed down by strong USD

Wilmar International - DBS Research 2015-11-12: Weighed down by strong USD WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International - Weighed down by strong USD 

  • 3Q15 core earnings of US$359m was slightly ahead 
  • Continued strong crushing margin boosted Oilseeds & Grains pretax against weaker-than-expected Sugar and Palm & Lauric segments 
  • Drop in China equity market resulted in US$61.8m mark-to-market losses in investment securities in 3Q15 
  • FY15F earnings adjusted by –3%; DCF-based TP unchanged at S$3.70. BUY rating reiterated. 


Highlights 


3Q15 core earnings slightly ahead. 

  • Core 3Q15 earnings of US$359m (-23% y-o-y; +85% q-o-q) were slightly ahead of our forecast on annualised basis. 
  • Core 9M15 net profit of US$816m (+1% y-o-y), accounted for 77% of our initial FY15 forecast vs. 72% historical average. 
  • Reported 3Q15 earnings came in at US$276m (-35% y-o-y; +37% q-o-q) – which included US$61.8m mark-to-market losses on investment in securities. 

Tropical oils pretax softer than expected. 

  • Oilseeds & Grains M&P pretax contribution was better than expected due to strong soybean crushing and Consumer Products businesses, while Associates' contribution rebounded from losses in previous quarter. These were offset by softer-than-expected Tropical Oils segment, due to lower palm oil prices and lower refining margins. 
  • Wilmar has not yet fully realised the lower domestic CPO prices in Indonesia since 16 Jul export levies; as it takes time for lower prices to work through Wilmar’s inventory. 
  • The group’s Sugar pretax is also below our forecast on an annualised basis, even as we impute a bit of volume left in the next quarter. 
  • Significantly weaker Australian Dollar, weaker Merchandising and Manufacturing dragged overall sugar pretax contribution. 


Outlook 


Continued strong 4Q15 contribution expected. 

  • We expect 4Q15 soybean crush margin to remain strong on favourable feedstock costs and steady soy meal prices in China, now that DDGS imports have been halted on antidumping investigations. 
  • Likewise, we expect Tropical Oils pretax to improve next quarter on the back of better refining margins and CPO price recovery since end-Sep-15. 

Valuation: 

  • Adjusting for mark-to-market losses in investment securities; we tweaked FY15F earnings by -3%. 
  • Our TP of S$3.70/share, based on 10-year Discounted Cash Flow (WACC 6.2%, TG 3%) and our BUY call are unchanged for 21% upside. 
  • We think Wilmar should at least meet our forecast. 
  • We believe the company remains undervalued for its dominance in Asia’s growing economies and integrated business model. 

Key Risks: 


Volatility in CPO prices and USD exchange rates. 

  • Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. 
  • Likewise, volatility in USD would affect profitability of planters in general. 

Reputation. 

  • Emergence of food safety scandals are one of the risks for food producers. Lapses in the supply chain could heighten this risk. 

Regulatory changes. 

  • Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils. 

Market sentiments. 

  • Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters. 


Balance sheet remains in decent shape 

  • Ending cash & cash equivalents: US$6,543m (-7% q-o-q). 
  • Cash flow from operations represented 3.4x core earnings for the quarter due to a drop in inventory. 
  • Total borrowing amounted to US$21,598m (from US$22,479m at the end of previous quarter) – thanks to drop in raw material costs. 
  • Net gearing ratio (ex NCI, liquid working capital, including other deposits in financial institutions): reported at 42% - up slightly from 39% at the end of 2Q15. 
  • 3Q15 capex was US$177m – declining from US$215m in 2Q15 in the absence of significant acquisitions.


Derek Tan DBS Vickers | Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2015-11-12
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.70 Same 3.70


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