Wilmar International - DBS Research 2016-01-29: Steadying the ship

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WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International - Steadying the ship 

Navigating volatility. 

• China’s decelerating economic growth means that Wilmar is focused on expanding margins within its product portfolio. 
• Being one of the largest integrated Agribusiness companies, Wilmar should benefit from stable commodity prices, diversified business model and risk management. 
• Over the long term, we expect Wilmar to gradually extend the penetration of well-established brands through its vast existing distribution networks in Asia’s growing markets. 

Key beneficiary of Indonesia’s B15 programme. 

• Starting 16 Jul15, Indonesia began charging levies for exports of various palm oil products at differentiated rates. 
• The consequential drop in domestic prices translates into lower feedstock prices for Wilmar – which buys most of its CPO requirements. 
• Equipped with the largest biodiesel capacity in Indonesia, Wilmar should likewise produce biodiesel profitably with subsidies collected from export levies. 
• With reduced participation of financial traders, we believe the catalyst for Wilmar lies in potentially stronger FY16 earnings. 

Mitigating impact from currency devaluation. 

• Wilmar’s reporting currency is in USD. Movements in its subsidiaries’ various functional currencies against USD affect their translations in Wilmar’s statements. But, Wilmar has mitigated the impact through: 
  1. currency hedging on raw material procurements and intercompany loans; 
  2. large fully integrated processing capacities and brands to defend margins vs. competitors; and 
  3. diversified business segments/geographies. 

Valuation: 

• We employed DCF methodology (WACC 6.2%, TG 3%) to arrive at our TP of S$3.70 for Wilmar. 
• We believe reduced volatility and steady growth in earnings ahead should move Wilmar’s forward PE closer to its average of 15.1x from 11.3x currently (close to -1SD). 

Key Risks to Our View: 

• Our call is premised on continued implementation of Indonesia’s B15 policy. Changes or delays to this policy would affect our estimates. 
• As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our price target.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-01-29

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