Wilmar International - UOB Kay Hian 2016-05-11: 1Q16 Below Expectation On Impairments And Lower Crushing Margins

Wilmar International - UOB Kay Hian 2016-05-11: 1Q16 Below Expectation On Impairments And Lower Crushing Margins WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International (WIL SP) - 1Q16: Below Expectation On Impairments And Lower Crushing Margins

  • Wilmar reported core net profit of US$222m (-36.5% qoq,-12.5% yoy), lower than our expectation. 
  • The variance came from lower-than-expected soybean crushing margins, lower contributions from other incomes, association contributions and one-off impairment. 
  • The sugar division gave a strong performance, supported by the merchandising business. 
  • We are maintaining our earnings with expectations of a stronger contribution from sugar in 2H16. 
  • Maintain BUY. Target price: S$3.95.



RESULTS


• Results below expectations. 

  • Wilmar International (Wilmar) reported 1Q16 core net core profit of US$222m (-36.5% qoq,-12.5% yoy). 
  • The results came in below our core net profit expectation of US$280m-300m. The variance was mainly due to weaker-than-expected soybean crushing due to large arrivals of soybean into China (sales volume +13% yoy) as well as weaker performance from JVs & associates due to lower contribution from China and its sugar associate in India. 
  • Wilmar restated 1Q15 earnings upon the adoption of Amendments to FRS16 and FRS41 with additional depreciation for bearer plants of US$13.2m for 1Q15 and US$14.0m for 1Q16. 
  • There were one-off impairments for shareholder’s loan to an associate (US$11.7m) and property, plant and equipment in Europe (US$11.0m).


STOCK IMPACT


• Tropical oils – strong downstream performance. 

  • Performance from this division was better than expected, attributable to better downstream margins. 
  • Lower feedstock prices and the delivery of biodiesel volume to Pertamina could have contributed better margins. 
  • Meanwhile, FFB production was lower qoq and yoy mainly due to the lagged impact of El Nino event. 
  • PBT margin for 1Q16 was higher at 4.3% vs 1Q15’s 3.5% and 4Q15’s 3.1%. 
  • Wilmar’s downstream activity will be supported by the sales of biodiesel. 
  • To recap, Wilmar has secured a total of 920,411 kilolitres for delivery in Nov 15-Apr 16 and 590,113 kilolitres for delivery in May 16-Oct 16.

• Sugar – smaller seasonal loss. 

  • Performance was within expectation. This division reported smaller loss before tax of US$18m vs loss before tax of US$68m in 1Q15. The yoy improvement is mainly attributed to stronger performance from merchandising business and higher sales volume from refineries, which mitigated the losses. 
  • The sugar division’s sales volume increased 8.1% yoy. We expect this division to continue showing strong performance in 2016.

• Oilseeds & Grains – weaker-than-expected crushing margins. 

  • The increase in PBT in 1Q16 was mainly due to higher consumer pack sales volume (+48.5% qoq, +12.7% yoy) as there was an increase in demand during the Chinese New Year festive season. However, the performance was dragged by lower crushing margins due to higher imports of soybeans into China. 
  • PBT margin for this division is relatively stable now with 1Q16 PBT margins standing at 3.8% vs 1Q15’s 3.7% and 4Q15’s 3.9%. 
  • Soybean crushing margins are expected to be capped by the excessive soybean imports into China in the upcoming months. 
  • Meanwhile, the demand for consumer products is expected to remain resilient and provide stable earnings to the group. Expansion into Consumer Pack plays an important role in stabilising the margins for this division.

• Amendments to FRS 41, Agriculture: Bearer Plants, 

  • ... effective for annual periods effective 1 Jan16 requires retrospective adjustment to the fair value of biological assets. 
  • The adoption of new and revised accounting standards relating to biological assets, the Group’s assets and shareholders’ funds saw a downward adjustment of US$752.0m in 1Q16, and additional depreciation booked for bearer plants was US$14.0m for 1Q16 and US$13.2m for 1Q15.


EARNINGS REVISION/RISK

  • No change to our earnings forecast. We are expecting an EPS of 21.5 US cents, 23.4 US cents and 24.3 US cents for 2016, 2017 and 2018 respectively.
  • We are maintaining our earnings with an expectation of stronger contribution from sugar in 2H16, and also pending outlook guidance from management later at the results briefing.



VALUATION/RECOMMENDATION

  • Maintain BUY and SOTP-based target price of S$3.95. This translates into a blended 2017F PE of 12.5x. 
  • Wilmar will benefit from a recovery of sugar prices with higher sales volume in Indonesia, while rising contribution from consumer pack will mitigate the volatility in soybean crushing operation.



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/ 2016-05-11
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.95 Same 3.95


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