Wilmar International - RHB Invest 2016-05-12: Consumer Segment To Take The Front Seat

Wilmar International - RHB Invest 2016-05-12: Consumer Segment To Take The Front Seat WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar - Consumer Segment To Take The Front Seat

  • Despite a decent set of results, the market sold down on the stock yesterday, as Wilmar cited challenging operating conditions for 2Q16. 
  • However, in our opinion, the higher CPO prices and improved profitability in the consumer products business would help it to tide through this quarter. 
  • Maintain BUY with a SOP-derived SGD4.25 TP (29% upside). 
  • Excluding the one-off provisions for impairments, its 1Q16 results met 20% of consensus’ full-year estimates, while all of its three divisions showed positive YoY growth.

Graduated from infancy stage. 

  • Substantial growth in volume and margin persisted for its consumer products business in 1Q16. We estimate its pre-tax margin to be in the high USD60+/tonne last quarter, mainly driven by improvement from its rice and flour operations. 
  • Based on Euromonitor’s data, Wilmar International (Wilmar) is now the second largest player (after China National Cereals, Oils and Foodstuffs Corporation (COFCO)) in China’s packaged rice market, with a 7.5% market share. 
  • We believe that volumes in rice and flour have passed the breakeven point and they are likely to deliver better margins going forward.

Unlocking value in the distribution chain with consumer goods. 

  • Wilmar’s aspiration in the consumer pack segment was once again re-emphasised during the analysts’ briefing yesterday. CEO, Mr Kuok, aims to achieve 10m tonne of sales volume in the consumer product business by 2020. This implies a 14.5% CAGR in volumes over FY15-20F. We believe this can be attained through the following initiatives:
    1. Developing new complementary products in the food or home-care space such as confectionery , snacks or bakery products;
    2. Partnerships or joint ventures (JV) to leverage on other recognised brands;
    3. Selling existing products such as rice and flour into more markets
    4. Set up a JV for central kitchens to capitalise on the existing distribution and logistical prowess in China.

Downside in oilseeds to be mitigated. 

  • According to management, the operating environment for soybean crushing was affected by excessive imports in China. This factor, coupled with the recent spike in international soybean prices due to bad weather conditions, is expected to hurt crushing margins in 2Q16. 
  • We think the situation should normalise in 3Q16, as China reduces its soybean imports at the current elevated soybean prices. 
  • On a full-year basis, we expect strong growth in the consumer business to offset the negative impact in soybean crushing.

Maintain BUY recommendation. 

  • We made minor tweaks to our forecast in FY16 but raised our earnings estimates for FY17-18 by 3.5%, driven by higher margins and volumes in the consumer business. 
  • Maintain BUY with a SGD4.25 TP, implying 15x FY16F P/E. 
  • Key risks include lower-than-expected crushing margins and volatility in sugar merchandising earnings.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-12
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 4.25 Same 4.25