Wilmar International - UOB Kay Hian 2016-02-01: 4Q15 Results Preview ~ Expecting Lower Earnings But Still A Good Set of Results

Wilmar International - UOB Kay Hian 2016-02-01: 4Q15 Results Preview ~ Expecting Lower Earnings But Still A Good Set of Results WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International (WIL SP) 4Q15 Results Preview: Expecting Lower Earnings But Still A Good Set of Results 

  • We are expecting Wilmar to report a net profit of US$300m-330m for 4Q15, on track to meet our expectation. 
  • The weaker yoy and qoq performance could be due to lower pre-tax margins from its palm and sugar divisions, dragged down by lower selling prices in the upstream operations. 
  • Oilseeds & grains should still enjoy good sales volume and margins on better soybean crushing margins and lower feedstock prices at its consumer pack segment. 
  • Maintain BUY. Target price: S$3.60. 


WHAT’S NEW 


• Scheduled to release 4Q15 results on 18 February after market close. 

  • We are not expecting any surprises from Wilmar International’s (Wilmar) operational numbers and earnings should be on track to meet our expectation. 
  • We forecast a net profit of US$300m-330m for 4Q15, lower yoy and qoq, largely due to lower pre-tax margins from its palm and sugar upstream operations. 
  • Oilseeds & grains should still enjoy good sales volume and margins on better soybean crushing margins and lower feedstock prices at its consumer pack segment. 

• Operational statistics to look out for in 4Q15. 

  • Although we are expecting lower earnings, we still expect to see a good set of results, given the high volatility in commodity prices. 
  • Some positive data to look out for in this set of results: 
    • Oilseeds & grains. Earnings will be supported by strong China operations, ie higher sales volume and better margins yoy. However, the impact is likely to be muted by the depreciation of the renminbi. Early Chinese New Year demand would have boosted 4Q15 sales as well. 
    • Sugar. Strong sales volume growth will mitigate the impact of lower margins. Wilmar bought 1.2m tonnes of raw sugar for Oct 15 delivery (average sales volume for 2014 was 1.66m tonnes/quarter) and at that time, sugar was trading at around 12.17 US cents/lb. Since then, sugar prices have recovered to 13-14 US cents/lb. This should translate into higher sales volume and margins for the merchandising & processing division. However, earnings for 2015 are expected to be lower than 2014 PBT of US$134.4m due to lower margins from milling and weaker operations in Indonesia. 
    • Palm refining margins. As the largest palm downstream producer, Wilmar is best positioned to capture the additional margins arising from the unusually wide spread between crude palm oil (CPO) spot and future prices. It will also benefit from lower feedstock prices (local selling prices are net of export levy) for its Indonesia’s refining operations as close to 90% of the required CPO are from third parties. 


STOCK IMPACT 


• Potential exceptional items likely to affect 4Q15 and 2015 results: 

  • Mark-to-market losses for equity investments in blue-chip stocks listed on the Hong Kong Stock Exchange. 
  • Forex translation losses as US$ has strengthened against Rmb. Some of Wilmar’s operations are not hedged and there are inter-company loans but these are unlikely to have a major impact as Wilmar’s net debt position is well hedged. 

• Further expansion into new food business into airlines and cruise lines. 

  • Wilmar has entered into a JV with Singapore Food Industries (a wholly-owned subsidiary of SATS) to supply high-quality food to the Chinese market. This is a new market for Wilmar, ie tapping into SATS’s operation to supply food to clients including airlines and cruise lines. 
  • Currently, Wilmar is supplying food ingredients to food processors (eg instant noodles), hotels and fast-food chains. This is a positive development as Wilmar is expanding into the higher-margin end-consumer segments and this may open up opportunities for Wilmar to tap into the China airlines market too. 


EARNINGS REVISION/RISK 

  • No change to our earnings forecasts of EPS of 17.4 US cents, 20.7 US cents and 22.0 US cents for 2015-17 respectively. 


VALUATION/RECOMMENDATION 


• Maintain BUY and SOTP-based target price of S$3.60. 

  • We have rolled over our valuation to 2016 and our key assumptions include 15x PE for its palm upstream, consumer pack and sugar divisions, 13x PE for its palm refining and soybean crushing divisions and 10x PE for the rest of its operations. 
  • Our 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 mandates 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/ 2016-02-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.60 Same 3.60


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