Wilmar International - UOB Kay Hian 2016-05-12: A Challenging Crushing Market

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - A Challenging Crushing Market

When we expect all segments to perform satisfactorily, soybean crushing margin again came under pressure as huge cheap soybean supply in China distorted pricing in the local market.
Key takeaways from management’s briefing are soybean crushing remains challenging with negative back-to-back margins now and market volatility may affect its sugar operations.
Wilmar is focusing on growing consumer pack sales volume in the mass market.

Crushing margin is under pressure due to more competitive prices by smaller crushing players as they benefit from the low- priced feedstock bought in 4Q15 without any forward hedging for its end products (margins are better now on higher soymeal and soyoil prices vs 4Q15).
Refiners in Malaysia and Indonesia are suffering from low utilisation rates due to the lack of CPO supply and having to pay more to get more CPO to increase utilisation rate. Thus, pure refining margins may not be good but this will be mitigated by better margins from biodiesel and niche downstream products.

Management opined that prices of most soft commodities had hit their lows last year and should rise in 2016.
However, prices should not appreciate too much and too fast, given that flattish demand, especially from emerging markets as their currencies have depreciated a lot against the US$, making their US$-based purchases more expensive. But the weather is still the most challenging factor.

Indonesia’s second mandated biodiesel procurement volume of 1.53m kilolitres was 18% lower vs the first procurement’s 1.87m kilolitre, but the volume in the second tranche is a more achievable target. The delivered volume for the first batch was 1.5m-1.6 m kilolitre, which is closer to the current procurement volume.
To recap, Wilmar secured 920,411 kilolitres (49.3% of total) for delivery in Nov 15-Apr 16 and 590,113 kilolitres (38.6% of total) for delivery in May-Oct 16.

Higher palm product prices will support a better performance from this division.
Upstream to perform well on better pricing but downstream operation could be challenging due to lower feedstock volume and margin pressure as prices rise.

A seasonally weaker 2Q due to lower demand post Chinese New Year and soybean crushing margin in 2Q16 will be under pressure with negative back-to- back margin due to stiff competition.
Strong margins from consumer packs should be able to mitigate the weakness in soybean crushing margins. This division should see improvement in 2H16 on higher festive demand while competition in its soybean operations in China should ease.
With the expected weaker crushing margin in 1H16 vs earlier guidance, we lower our PBT margin for this division for 2016.

This division’s performance will be supported by higher sales volume for both milling and merchandising. Rising sugar prices will boost performance for its milling operation. However, management said that recent volatility in sugar prices will also have an effect on its sugar operation.
1Q16 performance was within expectation. The higher sugar import quota given in Indonesia vs 2015 should translate into better margins.
The floor price for sugar in Indonesia is much higher than international prices to encourage more local production. Indonesia is a net sugar importer.

We lower our 2016 net profit forecast to factor in one-off impairments of US$22.7m in 1Q16 and also reduce our Oilseeds & Grain margins to 3.4% (from 3.7%) on lower crushing margins.
We fine-tune our 2017 and 2018 net profit forecasts by 1.8% each.
We now expect EPS of 20.4 US cents, 23.0 US cents and 23.9 US cents for 2016-18 respectively.

Maintain BUY with a lower SOTP-based target price of S$3.80 after our earnings adjustments. This translates into 12.5x blended 2017F PE.
Wilmar will benefit from a recovery in sugar prices with higher sales volume in Indonesia, while rising contribution from consumer pack will mitigate the volatility in soybean crushing operation.

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

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