Wilmar International - CIMB Research 2016-07-19: Profit warning for 2Q16

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WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International - Profit warning for 2Q16

• Wilmar expects to report a net loss of approx. US$230m for 2Q16.
• The losses were due mainly to untimely purchases of soybeans.
• We are negative on this as its 2Q results will be significantly below expectations.
• We cut our FY16-18 earnings estimates by 9-31% and our SOP-based target price drops to S$3.23.
• Downgrade to Reduce due to concerns over its near-term prospects.

Potential net losses of US$230m in 2Q16

• Wilmar announced that it expects to report 2Q16 net losses of ~US$230m (vs. 2Q15 net profit of US$202m) following a preliminary review of its unaudited financial results due to the challenging operating environment. However, it expects to remain profitable in 1H16. 
• It expects the operating environment to normalise for the rest of the year, and its long- term prospects to strengthen as it continues to execute its growth strategy, as demonstrated by recent developments in its ventures in Vietnam and India. 
• Wilmar will release its 1H16 results on 11 Aug.

Oilseeds and grains segment the key reason for the losses

• Wilmar attributed the 2Q losses mainly to the oilseeds and grains segment and partially to the sugar segment. Its tropical oils and consumer products segments continued to perform satisfactory. 
• The losses in oilseeds and grains were due to untimely purchases of soybeans in a highly volatile and disruptive market which led to significant losses. 
• Unexpected flooding in Argentina affected the soybean harvest, and heavy participation of funds in the future markets, amongst other factors, contributed to the volatile market.

Sugar losses to widen in 2Q16

• The group indicated that its sugar losses in 2Q this year will be wider than in the previous year due to delays in harvesting and accounting mark-to-market losses on hedges. It added that dry weather in Australia in the early part of 2016 is also expected to reduce the volume of cane crushed in the current year.

Negative as 2Q results are significantly below expectations

• We are negative on this news as the preliminary net losses of approx. US$230m in 2Q16 is below our and market expectations of a profitable 2Q. Although the group had warned of a challenging operating environment in 2Q, we had not expected it to sink into its first quarterly losses since listing. 
• This is the first time that the profits of other segments were not able to cushion the losses from its oilseeds and grains division. This could raise concerns over the low visibility of the group’s earnings.

Cut earnings estimates by up to 31%; downgrade to Reduce

• We cut our earnings forecasts for FY16-18 by 9-31%, to reflect the 2Q profit warning and challenging operating environment. 
• Our earnings cut is mainly to reflect weaker oilseeds and grains, and sugar earnings. This leads us to reduce our SOP-based target price to S$3.23/share. 
• We downgrade the stock to Reduce from Hold due to concerns over its weak near-term earnings prospects. 
• Upside risks to our calls includes better than expected crush margins.

Ivy NG Lee Fang CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-19

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 3.23 Down 3.49