Wilmar International - DBS Research 2016-06-14: Expanding earnings

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Expanding earnings

Our FY16F/17F earnings are revised by +3%/-1% on changes in our key assumptions.
Expect recovery in Oilseeds & Grains in 2Q16 and 3Q16 on recovery in soybean crush margins.
DCF-based TP raised to S$3.76 – on slight upward revisions in processing margins.

In this report we upgraded Wilmar to BUY from HOLD, as we believe the recent correction is excessive.
Improvements in China’s spot crush margins since April 2016, continued sizeable allocation in Indonesia’s biodiesel mandate, and potential India expansion through Adani-Wilmar’s proposed JV with Ruchi should drive the group’s near- and medium-term earnings growth.
Over the long term, we expect Wilmar to gradually extend penetration of well-established brands – including that of Goodman Fielder – through its vast existing distribution networks in China.

Adani-Wilmar’s proposed JV with Ruchi could expand the group’s presence in India significantly. Adani-Wilmar has approximately 20% market share in consumer-pack vegetable oils in India – predominantly in the north, while we understand Ruchi has slightly more (mostly in bulk vegetable oils) – predominantly in the south.
We believe a combination of both operations could unlock new markets for Adani-Wilmar and increase distribution efficiency.

Since narrowing in March 2016 on excessive soybean arrivals in China, soybean spot crush margin has rebounded since April 2016.
We are maintaining our conservative forecasts for Wilmar, as we expect processing margins to moderate in 4Q16.
Tropical Oils manufacturing margins is maintained, although we anticipate more volume as consequence to IOI’s suspension from RSPO certification from April 2016.

We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.76 (WACC 6.8%, TG 3%).
We lowered Singapore’s risk free rate to 2.3% from 3.0% previously.

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 offtake 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/ 2016-06-14

DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 3.76 Up 3.75