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

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.



Growing the integrated business model. 

  • 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.


Breakthrough in India? 

  • 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.


Tweaking FY16F/17F earnings and TP. 

  • 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.


Valuation:

  • 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.


Key Risks to Our View:


  • 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


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