Wilmar International - UOB Kay Hian 2016-02-22: Operational Improvement Offsets Impact From The Unwinding Of Carry Trade

Wilmar International - UOB Kay Hian 2016-02-22: Operational Improvement Offsets Impact From The Unwinding Of Carry Trade WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International (WIL SP) - Operational Improvement Offsets Impact From The Unwinding Of Carry Trade 

  • Investors’ confidence in Wilmar should improve after two consecutive years of less volatile earnings amid market concerns over earnings impact from a potentially huge drop in interest income from the unwinding of carry trade, renminbi depreciation and overcapacity in soybean crushing in China. 
  • 2016 should be another steady year with continuing growth from oilseeds & grains and recovery in the other two segments. 
  • Maintain BUY. Target price: S$3.60. 


 Maintain BUY post analyst briefing. 

  • We maintain our positive view on Wilmar post 2015 results briefing. Management is providing more information on its carry trade to clear market concerns over a potential sharp drop in interest income on its bottom line, which clearly did not have a major impact on 2015 earnings. 
  • Also, the slight decline in 2015 earnings also showed Wilmar’s resilient business model despite the bearish commodity prices in 2015 and sharp depreciation of most operating currencies against the US dollar. 

 Volume growth still the main earnings driver in 2016, with small margins improvement driven by Tropical Oil. 

  • We are expecting an earnings growth of 10% in 2016, driven by volume growth again. Pre-tax margins should also improve marginally on from better palm oil and sugar prices. 
  • Key guidances during the briefing are largely in line with our expectations. 

 Key takeaways from briefing: 

  1.  Oilseeds & Grains (48% of 2015 PBT): Strong volume growth is sustainable with margin improvement mainly supported by consumer products. Volume growth for this segment is driven by a small organic growth, product expansion and gains in market share (mainly soybean crushing). Rice and flour-related businesses are now profitable. 
  2. Tropical Oil (38% of 2015 PBT): Volume growth in 2016 largely supported by manufacturing volume, especially the biodiesel contract in Indonesia. Margins should improve on better prices for palm products. The plantation division is likely to deliver better results in 2016, largely driven by better CPO prices as production is expected to be flat at best with FFB yield affected by the dry weather in 2015. 
  3. Sugar (5.8% of 2015 PBT): Management is confident of delivering another year of strong sales volume growth, driven by higher merchandising & processing volume. This division should deliver a small improvement in margins as sugar prices improve on potentially lower supply from Brazil.


 Improving cash flow to support any M&A when good assets are available. 

  • With a strong free cash flow (FCF) of US$1.1b in 2015 (2014: US$993m), Wilmar is ready to acquire any good assets if prices are right. 
  • Key focus areas for expansion will be consumer products and sugar. 
  • Management said there are good assets for sale now but the asking prices are still relatively high. 

 As clarified by management, lower interest income from carry trade will not have significant impact on earnings. 

  • As interest rate arbitraging opportunities closed, Wilmar has reduced its carry trade position. This led to a 22% yoy decline in Interest income to US$470.5m for 2015 (2014: US$600.5m). 
  • The off balance sheet position was reduced from US$7b in 2014 to US$4.4b in 2015 and this will be fully unwind by end-16. 
  • Despite the sharp drop in interest income, core net profit was only down 4%, or US$54m, in 2015 (Interest income dropped by US$130m). This was well within management’s clarification during 3Q15 results briefing that the unwinding of carry trade will not have significant impact on earnings. 

 Interest cost to go up as arbitraging window closed. 

  • Net cost of financing for Wilmar was low in the past two years as management took advantage of low US$ borrowing rates vs the China’s onshore deposit rate to reduce its overall cost of borrowings. 
  • With the arbitraging window closed, the unwinding of these positions will lead to an increase of at least 100bp to Wilmar’s effective cost of financing effective 2016. Its average cost of borrowing would have been higher at 2.36% and 3.14% for 2014 and 2015 instead of - 0.04% and 1.74% if management did not take arbitrage positions (see RHS table). 
  • Although 2016 will see higher cost of borrowings, this is likely to be mitigated by lower borrowings and better operational earnings. 

 On Indonesia’s biodiesel mandate, management said the government has a strong will to carry out the mandate, given declining domestic crude oil production. 

  • Based on the current biodiesel blending per month of about 250,000 tonnes and the CPO Fund of Rp6t-17t, the fund can subsidise the biodiesel mandate up to Aug/Sep 16 at CPO price of US$600/tonne and current crude oil price of US$30/bbl. 
  • From the recent 1.87m kiloliters of biodiesel contracts awarded by Pertamina and AKR Corporindo for delivery between Nov 15 and Apr 16, Wilmar has allocated almost 50% of the required volumes. These volumes will be a boost to Wilmar’s Tropical Oil sales volume (about 3% of 2015 sales volume). The cost of sales of biodiesel under the mandate programme is well covered under the pricing formula (CPO + US$125 + transportation cost). 
  • Given economies of scale and high utilisation rate, we believe Wilmar is able to sell its biodiesel at a reasonable profit per tonne. 


  • We fine tune our earnings forecasts to reflect higher depreciation from new accounting rules on biological assets and financing cost. This leads to marginal adjustments of - 2.6% to our 2016 net profit forecast. 
  • We forecast EPS of 20.2 US cents and 22.3 US cents for 2016-17 respectively. 
  • We also introduce 2018F EPS of 23.3 US cents. 


  • Maintain BUY and SOTP-based target price of S$3.60. This translates into a blended 2016F PE of 12.7x. 
  • Wilmar’s share price performance had lagged behind peers on concern of the carry trade and impact from a weakening renminbi. 
  • With 2015 results showing resilient earnings, investors’ confidence should improve and they would appreciate Wilmar’s integrated business model. 


  • Consolidation of soybean crushers could lead to better margins. 
  • Weather-induced commodities price hikes. 
  • 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/ 2016-02-22
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.60 Same 3.60