Wilmar International - UOB Kay Hian 2015-11-13: Optimistic Outlook

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

Wilmar International (WIL SP) - Optimistic Outlook 

  • Post 3Q15 results briefing, we maintain our positive view on Wilmar. 
  • 4Q15 earnings are likely to be better yoy, coming from a better performance from Tropical Oils and sustainable performance from Oilseeds & Grains as sales volumes would be boosted by pre-Chinese New Year demand and better margins. 
  • The sugar performance is mixed as downstream should deliver better PBT but offset by upstream contribution as crushing was largely done in 3Q15. 
  • Maintain BUY. Target price: S$3.60. 



WHAT’S NEW 


 More optimistic guidance. 

  • The key takeaway from Wilmar’s results briefing is 4Q15 earnings are expected to be better than in 3Q15, given that CPO and sugar prices have improved and large biodiesel contracts should help boost downstream margins in Indonesia. However, the improvement in CPO prices is likely to be capped by the high oilseeds inventory globally while the low crude oil prices are keeping discretionary biofuel demand away from the market. 
  • From the briefing, we feel management is more optimistic now than in the last few quarters. 
  • Rising sales volume was still the main driver for the good earnings and Wilmar is seeking for more M&A opportunities to expand its businesses. 
  • Building up a stronger Consumer Packs business will be the main focus and bringing in more products to the same distribution markets would help reduce cost per unit. This strategy has been working well for Wilmar, given its Consumer Pack’s margins has been on a rising trend. 

 Performance from Oilseeds & Grains is sustainable. 

  • The margin improvement from this division was attributable to: 
    1. the 25% increase in sales volume from manufacturing in 9M15 which brought down cost per unit, 
    2. consumer products delivering better margins on higher sales and product expansion, and 
    3. no distortion from financial traders and we do not foresee these trades coming back anytime as banks in China are not giving any financing to these players. 
  • 4Q15 sales volume should continue to do well, driven by preChinese New Year demand while the current margin range of US$10-15/tonne should be the new norm for its soybean crushing margins. 

 Sugar should improve over 3Q15. 

  • Sugar performance for 3Q15 was largely dragged by the depreciation of the Australian dollar. Sugar milling would see lower contribution qoq and yoy in 4Q15 as 70-75% of the sugar canes were crushed in 3Q15 vs 60% in 3Q14. 
  • The lower milling contribution should be offset by higher sales volume and better PBT margins from Merchandising & Processing, i.e. benefitted from the recent sugar price recovery. 
  • For 9M15, Sugar division reported PBT of US$3.2m or or < 1% of total PBT.


STOCK IMPACT 


 Tropical Oil should be boosted by better CPO prices and margins from biodiesel contracts. 

  • This division underperformed in 3Q15 largely due to lower prices. But it is expected to perform better in 4Q15, given the recovery in CPO prices and support from the biodiesel contracts that were just awarded by Pertamina. 
  • Being the largest palm-biodiesel producer in Indonesia, it is not a surprise that Wilmar was given the largest allocation of close to 50% from the latest Pertamina award for delivery in Nov 15 to Apr 16. However, the monthly delivery schedule has not been released. 
  •  is expecting Indonesia’s biodiesel blending is likely to hit 4m tonnes for 2016, significantly higher than 2015’s 1.2m- 1.4m tonnes. This is one of the strong supporting factors for higher CPO prices in 2016. 

 Investment mark-to-market loss to reverse. 

  • A non-operating loss of US$789m was reported in 3Q15 (3Q14: US$5.2m loss) was mainly due to losses arising from the group’s investment securities as a result of weakening equity markets. However, the portfolio has recovered to about US$23.8m in Oct 15. 
  • Improvement in equity markets should enable Wilmar to see positive investment returns in 4Q15. 

 Slowly unwinding exposure to financial arbitraging. 

  • This is shown in the significant downtrend in its off balance sheet items from a peak of US$9.1b as at end-Jun 14 to US$5.2b as at end-Sep 15. This exposure should be reduced significantly by end-16. 
  • The off balance sheet items refer to bank loans and other bank deposits that have substantial risks and rewards of the cash flow arising from the deposits and have also legally been released from the responsibility for the loans. 


EARNINGS REVISION/RISK 

  • No change to our earnings forecast. 
  • We are expecting an EPS of 17.4US cents, 20.7 US cents and 22.0 US cents for 2015, 2016 and 2017 respectively 


VALUATION/RECOMMENDATION 

  • Maintain BUY. 
  • We roll over valuation to 2016 and maintain our SOTP-based target price of S$3.60. 
  • Key assumptions include 15x PE for its palm upstream, consumer pack and sugar divisions, 13x for its palm refining and soybean crushing businesses and 10x for the rest of its operations. 
  • Our SOTP target price translates into a blended 12.4x 2016F PE (5-year mean). 


SHARE PRICE CATALYST 

  • Consolidation of soybean crushers could lead to better margins. 
  • Weather-induced commodities price hike. 
  • Full implementation of the biodiesel mandate globally could lead to better demand for biodiesel. Wilmar is the world’s largest palm biodiesel producer.


Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.60 Same 3.60
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