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.

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.

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.

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.

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.

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.

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

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.

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

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