Wilmar International - UOB Kay Hian 2016-04-25: 1Q16 Results Preview: Sweetened By Rising Sugar Prices

Wilmar International - UOB Kay Hian 2016-04-25: 1Q16 Results Preview: Sweetened By Rising Sugar Prices WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International (WIL SP) 1Q16 Results Preview: Sweetened By Rising Sugar Prices 

  • Wilmar is likely to post a core net profit of US$280m-300m, up 8-14% yoy thanks to stronger profit from sugar processing and better contribution from oilseeds & grains. 
  • The palm division is likely to show mixed signals in terms of performance as sales volume might be lower and downstream margins are expected to be better. 
  • We raise our earnings forecast on the potentially better profit margin and higher sugar refining sales volume. 
  • Maintain BUY with a higher target price of S$3.95. 


WHAT’S NEW 


 1Q16 results preview – Sugar processing and consumer packs to shine. 

  • Wilmar International’s (Wilmar) 1Q16 results are scheduled to be released on 10 May 16 after the market closes. 
  • It would be interesting to see how the spike in sugar and palm oil prices have translated to better profit and contribution from the delivery of biodiesel to Pertamina and AKR Corporindo. 

 Expecting US$280m-300m core net profit in 1Q16 vs 1Q15 core net profit of US$263.3m. 

  • Wilmar’s core net profit is expected to be lower qoq due seasonal factors, ie sugar milling season only begins in May. Our earnings expectation for 1Q16 are based on the following: 
    1. Sugar (5.8% of 2015 PBT): This is the division that is expected to show significant growth in terms of sales volume, largely driven by the refining business. In Oct 15, Wilmar bought 1.2m mt of raw sugar on ICE Futures when prices were trading at around 12-13 US cents a pound. This purchase of raw sugar is expected to translate into higher sales growth in 1Q-2Q16, and thereby lead to margin improvement given that sugar is selling at higher prices now than in 4Q15. In 2016, the rate of global sugar production is likely to fall behind consumption growth for the first time in five years and this has been the main contributing factor to the recent sugar price rally. 
    2. Oilseeds & Grains (48% of 2015 PBT): Consumer pack sales volume should have seen strong growth in 1Q16 due to Chinese New Year demand. Higher soybean imports by China also suggest higher crushing utilisation rates at Wilmar in 1Q16, given that animal feed-related soymeal demand has been good. This is likely to translate into better or stable crushing margins for Wilmar. 
    3. Tropical Oils (38% of 2015 PBT): 1Q16 is likely to be the slowest quarter for this division, given that selling prices for palm products were still lower yoy while sales volume is expected to be low as the sector is suffering low production. The bright spot for this division would come in the form of support from biodiesel sales volume. Recall that Wilmar secured a total of 920,411 tonnes for delivery in Nov 15-Apr 16 or about 460,000 tonnes per quarter (biodiesel sales volume was very low in 2015). 


STOCK IMPACT 


 1Q16 earnings will be affected by higher depreciation due to the new accounting standard for biological assets. 

  • The new accounting treatment for biological assets took effect on 1 Jan 16, and as such 1Q16 results will reflect higher depreciation. 
  • During the 4Q15 results briefing, management guided that the additional depreciation would be close to US$50m a year and this will be expensed out every quarter. 
  • We have factored in this change to our earnings estimates. 


EARNINGS REVISION/RISK 


 Revised up earnings forecast. 

  • We have revised our earnings forecast higher as we have raised our sugar PBT margin assumptions in view of the potential rise in sugar prices which would come on the back of a sugar shortage as production drops due to unfavourable weather. 
  • Our 2016/17/18 net profit forecasts have been raised by 6.3%, 5.0% and 4.1% respectively. 
  • We forecast an EPS of 21.5 US cents, 23.4 US cents, and 24.3 US cents for 2016/17/18 respectively. 


VALUATION/RECOMMENDATION 


 Maintain BUY and with a higher SOTP-based target price of S$3.95. 

  • This translates into a blended 2017F PE of 12.5x. We have raised our target price on the potentially higher earnings and base our target price on 2017F EPS. 
  • Wilmar should benefit from the recovery in soft commodity prices after subdued price movements in the last 2-3 years. The recent recovery in soft commodity prices was largely driven by a reduction in production after 2015 was hit by the “worst ever” El Nino. 
  • Recovery in production might not happen in the near term given the rising chance of an La Nina weather phenomenon emerging in 2016 which will lead to higher rainfall in the pacific but dryness in the northern hemisphere. 


SHARE PRICE CATALYST 

  • Consolidation of soybean crushers could lead to better margins. 
  • Weather-induced commodity 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/ 2016-04-25
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.95 Up 3.60


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