Wilmar International - CIMB Research 2016-05-10: Unexciting near-term prospects

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WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International - Unexciting near-term prospects

• 1Q results broadly in line at 19% of our and 18% of consensus full-year earnings.
• Oilseeds and grains benefitted from margin improvement in consumer products.
• Tropical oils earnings impacted by US$11m impairment charge.
• Wilmar expects crush margin in China to come under pressure in 2Q.
• Downgrade to Hold as the share price has done well and 2Q earnings could be unexciting.

1Q broadly in line with expectation

• Wilmar’s 1Q16 core net profit fell by 16% yoy due mainly to weaker earnings from tropical oils and lower associates earnings. 
• On a qoq basis, 1Q16 core net profit fell by 37% due to losses from the sugar division. 
• Although 1Q16 core net profit made up only 19% of our and 18% of consensus full-year forecasts, we deem the results in line as we expect stronger earnings in the coming quarters, driven by positive sugar contributions.

Oilseeds and grains continue to do well

• The oilseeds and grains segment registered a 2%/3% yoy/qoq improvement in its 1Q16 PBT to US$169m as higher sales volumes and margin improvement in its consumer products business more than offset the lower crush margin. 
• Wilmar revealed that the weaker crush margin in 1Q was due to the excessive arrival of soybeans into China.

Better downstream earnings help offset lower output and prices

• The tropical oils segment (comprising plantations and palm oil processing) posted a 2% drop in PBT to US$149m due to lower FFB output, CPO prices, higher depreciation charges and a US$11m one-off impairment in PPE. 
• The good news is that its downstream business posted stronger earnings due to lower palm product prices.

Strong sugar merchandising profit helped narrow sugar losses

• The group posted significantly lower losses of US$18m from its sugar division in 1Q16 vs. US$68m in 1Q15. 
• The seasonal 1Q16 losses from its Australian sugar milling division were partially offset by higher sales volumes from its Indonesian sugar refineries and stronger profit contribution from its sugar merchandising business.

Brace for challenging operating environment in 2Q16

• Wilmar has said that 2Q operating conditions are expected be challenging due to its view that 
  1. crush margins could come under pressure due to excessive soybean arrivals into China in the coming months; 
  2. downstream business could fetch lower margins due to higher feedstock costs and 
  3. the volatile sugar prices could affect its sugar operations.

Downgrade to Hold, limited near-term catalysts

• We are downgrading the stock to Hold from Add given the limited near-term upside and the challenging 2Q operating prospects. 
• Wilmar’s share price has appreciated by 8% since Feb 16 and currently offers only 2.5% upside to our unchanged SOP-based target price of S$3.49. 
• We see strong share price support as the stock trades at 1x CY16 P/BV.

Ivy NG Lee Fang CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-10

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 3.49 Same 3.49