Wilmar International - CIMB Research 2016-02-22: Upgrade to Add on improving prospects

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WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International - Upgrade to Add on improving prospects 

• We are more positive on the group following 4Q’s results briefing. 
• The group puts to bed concerns over “carry trade” impact on earnings. 
• Its tropical oils business is expected to benefit from rising CPO price. 
• We are positive that its rice and flour businesses in China have turned profitable. 
• Upgrade to Add due to improving earnings prospects and attractive valuations. 

Key takeaways from results briefing 

• The key takeaways from Wilmar’s results briefing are: 
  1. concerns over its unwinding of carry trade proved unfounded; 
  2. rice and flour businesses in China have turned profitable; 
  3. higher biodiesel consumption in Indonesia will benefit its tropical oils division; 
  4. no plans to venture into property in the immediate term; and 
  5. keen on M&A at the right price. 

Putting to bed concerns over “carry trade” 

• Wilmar provided a detailed explanation on its finance and hedging costs for past 2 years to articulate that the unwinding of the “carry trade” will not have a significant impact on earnings. Carry trade refers to the group’s treasury activities of borrowings in US$ and parking its cash in RMB deposits, allowing it to enjoy lower net interest costs of 1.74% vs. avg. borrowing rate of 3.14% in 2015. 
• Assuming net interest costs revert to market rate, we estimate it will raise borrowing costs by US$161m (or 3% net earnings impact). However, this is expected to be offset by improving processing margins for its oilseeds. 

Beneficiary of higher CPO price, Indonesia’s biodiesel programme 

• We expect the group’s tropical oils division to benefit from the rising CPO prices in 1Q16. This is because higher CPO prices will boost its plantation earnings and its downstream business will gain via better margins from its stockholdings. 
• The good progress made by the Indonesian government in raising its biodiesel consumption via the CPO fund is also expected to benefit Wilmar, the largest biodiesel producer in Indonesia, as this will raise the utilisation rate of its biodiesel plants and margins. 

Improving oilseeds and grains prospects 

• We are more positive on its oilseeds and grains prospects as 
  1. the group’s rice and flour businesses in China have turned profitable after many years of investment, and 
  2. back-to-back soybean crush margins in China remains high in the first two months of 2016. 
• We expect the 1Q earnings from this division to remain strong as the consumer products business is expected to benefit from festive sales during Lunar New Year and the improving operating environment of the soybean crush business in China. 

Upgrade to Add with higher target price of S$3.50 

• We are upgrading Wilmar to an Add from Hold with a higher SOP-based target price of S$3.50. 
• We have fine-tuned our SOP to reflect the latest financial numbers and exchange rates. The key reasons for the upgrade are 
  1. its undemanding forward P/E valuations of 11-13x and P/BV of 0.9x; 
  2. turnaround of its rice and flour businesses; and 
  3. expectations the tropical oils division will benefit from recovering CPO prices.

Ivy NG Lee Fang CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-22

CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 3.49 Up 3.28