Wilmar International - RHB Invest 2016-05-05: Challenging Market Perceptions

Wilmar International - RHB Invest 2016-05-05: Challenging Market Perceptions WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar - Challenging Market Perceptions

  • The market is wrong, in our view. Wilmar’s share price has been trading within a band of SGD2.52-3.64 since 2012 but we think it is time to re-rate the stock due to the following reasons:
    1. The oilseeds crushing market has structurally improved;
    2. Its ability to tap on Chinese consumers’ desire for foreign goods;
    3. To harness the inherent value in the distribution chain;
    4. Favourable weather patterns.
  • We re-initiate coverage on Wilmar with a BUY call and SOP-based TP of SGD4.25 (21% upside).

Oilseeds are in! 

  • The tightening of banking regulations has eradicated shady commodity financing deals in China. This has brought more than three years of oilseed price disruptions to an end. 
  • Today, overcapacity has also become less of an issue with utilisation rate improving tremendously. 
  • In this environment, we think the market should revalue this segment given that more stable crushing margins could be achieved going forward.

Foreign is good in China. 

  • Chinese’s love for foreign brands is apparent. A spate of food safety issues have led to locals opting for foreign products.
  • Wilmar International’s (Wilmar) Arawana brand, backed by its strong “Singapore branding”, is the no.1 edible oil brand in China. We expect higher margins from its consumer pack division as its rice and flour, marketed under the same brand, generate better profitability. 
  • The acquisition of Goodman Fielder would also provide it with a new range of products to leverage on the rising Western influence on Chinese consumption habits.

Inherent value in distribution chain. 

  • The market is not astute to the worth of Wilmar’s distributing prowess, in our view. Its network spans across more than 50 countries including emerging markets like Africa, China and India. We believe the value of the distribution chain can be further harnessed by injecting complementary products into it. Increased partnerships and joint ventures (JVs) would allow Wilmar to monetise its extensive distribution efficiently. 

Favourable weather patterns. 

  • Wilmar’s share price has rallied recently on the back of higher CPO prices, and we expect CPO prices to remain strong till 1H17. This, together with higher biodiesel mandates in Malaysia and Indonesia, is likely to shore up tropical oils’ margins. 
  • Additionally, El Nino has resulted in ample supply of soybeans this year. We expect Wilmar’s oilseeds business to deliver strong margins in FY16F followed by lower but more stable margins in subsequent years. 

Time to relook at Wilmar. 

  • We value the stock using SOP, with our SGD4.25 TP implying 14.5x FY16F P/E. 
  • We forecast EPS to grow 7.8% over FY15-18F. We think its current valuation at 1x FY16F P/BV is a steal as most of Wilmar’s processing plants have been fully depreciated. 
  • Key risk is volatility in sugar merchandising earnings.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-05
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 4.25 Same 4.25