Wilmar International - DBS Research 2016-05-11: Near-term challenges

Wilmar International - DBS Research 2016-05-11: Near-term challenges WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International - Near-term challenges 

  • 1Q16 core earnings slightly below our expectations.
  • Operating margins met/exceeded expectations; but results were dragged down by provisions, lower associates/interest income.
  • FY16F/17F earnings cut 6%/4% on lower expected crushing/Tropical Oils downstream margins in 2Q16.


1Q16 core earnings below on annualised basis. 

  • Core 1Q16 earnings of US$222m (-12% y-o-y against restated US$254m) represented 20% of our full-year target (vs. historical average of 22%). 
  • Reported 1Q16 earnings came in at US$239m (+3% y-o- y against restated US$232m), which included US$17m non- operating gains (net of tax impact) arising from FX translation gains from inter-company loans, and gains from investment securities.


Growth was driven by Tropical Oils, Sugar. 

  • Oilseeds & Grains continued to deliver stable pretax of US$168.8m (+2% y-o-y). But growth in overall pretax was mostly driven by Tropical Oils, which delivered pretax of US$149.3m (+8% y-o-y) – even after US$11.0m one-off impairment on PPE (as part of restructuring exercise in Europe). 
  • Sugar segment also reported lower seasonal loss of US$18.2m (vs. US$68m loss in 1Q15), thanks to higher sales volume from Indonesia refinery and higher contribution from Sugar merchandising.


Crush margins to come under pressure. 

  • We understand crush margins began to narrow from Mar-16, as excessive soybean buying (in reaction to good crush margins in the previous quarters) drove up soybean prices and pressured end-product prices. Reflecting this, we adjusted our crush margin forecasts 14% lower. 
  • We also reduced Tropical Oils manufacturing margins by 2% on lower expected refining margins, although we anticipate more volume – as demand for sustainable products may increase in consequence to IOI’s suspension from RSPO certification from 1 April 2016. 
  • All in, FY16F/17F earnings are revised down by 6%/4%.


Valuation:

  • We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.75 (WACC 6.9%, TG 3%).


Key Risks to Our View:

  • Wilmar’s share price is linearly driven by palm oil refining/ soybean crushing margins on top of CPO/sugar price expectations. There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (2.5m kl) this year. 
  • As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our TP.





Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-05-11
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 3.75 Down 3.85


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