Wilmar International - DBS Research 2016-07-20: Issues 2Q16 profit warning

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Issues 2Q16 profit warning

Preliminary review of unaudited results indicate net losses of US$230m for 2Q16.
Losses in Oilseeds & Grains manufacturing and steeper-than-expected and losses from sugar were the main drags.
Size of losses suggest significant mark-to-market losses on short hedges.
Forecast and rating under review.

Based on preliminary review of unaudited 2Q16 financial results, Wilmar announced that it expects to book net losses of approximately US$230m for the quarter. This would thus bring its net earnings to just c.US$9m for 1H16.
The losses in 2Q16 were mainly from the manufacturing sub-segment within Oilseeds & Grains and weaker than expected Sugar segment, as explained below:
1. Untimely purchases of soybeans in a highly volatile and disruptive market had resulted in significant losses
2. Unexpected flooding in Argentina affected soybean harvest and heavy participation by funds in the futures market contributed to volatility in the markets
3. Sugar posted wider losses than in 2Q15, as rainfall had delayed harvesting; Wilmar recognized mark-to-market losses on hedges as a result of higher sugar prices
4. The group also expects sugarcane milling volume for FY16 to fall due to the dry weather in the early part of this year.

In our view, the losses in Oilseeds & Grains point to not only low inventories, but also significant mark-to- market losses on short positions on its hedges – realised and unrealised.
The group typically enters short positions in the futures markets as it acquires its physical soybeans before they are processed and sold – as a hedge for processing margins.
In cases where losses are reported in a rising price environment, short positions may have been in excess of physical; or futures prices had moved faster than physical prices. In this case, we suspect the latter may have occurred.

Wilmar’s announcement suggests earnings are expected to normalise in 2H16. However, given the magnitude of the losses, our below-consensus estimates now look aggressive. While 2Q16 performance may not necessarily have any causal influence on FY17F’s outlook, we may have to assume a higher processing discount in our earnings or valuation.
Assuming zero pretax for Oilseeds & Grains segment this year, and lower sugarcane yields of 70 MT/ha (from 90 MT/ha) and sugar extraction rate of 13% ( from 14%) – ceteris paribus – we estimate that Wilmar’s net earnings in FY16F would be US$802m – representing a 26% cut from our current estimate of US$1,085m.
And, assuming crushing pretax margin of c.1.9% (vs. 2.6% previously) from FY17F onwards, Wilmar’s FY17F earnings would likewise be cut by 8% to US$1,040m.
Under these assumptions, the stock would hence be valued at S$3.13 (vs. our current TP of S$3.76) based on DCF.
Prior to this announcement, we had a BUY call with a TP of S$3.76 for Wilmar. We are putting our rating and forecast UNDER REVIEW, pending discussions with management.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-07-20

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