Wilmar International - RHB Invest 2016-07-20: Confidence Crushed By Soybeans

Wilmar International - RHB Invest 2016-07-20: Confidence Crushed By Soybeans WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar - Confidence Crushed By Soybeans

  • We are downgrading Wilmar to NEUTRAL (from Buy) and cutting our TP to SGD3.28 (from SGD3.99, 2% downside) as a result of its profit warning last night. 
  • It expects to report a net loss of c.USD230m for 2Q16. 
  • The oilseeds crushing business did significantly worse than street’s and our expectations. 
  • Although we expect some recovery in 2H16, in view of the falling soybean prices since the start of this quarter, we cut our FY16 earnings estimates by 29% as we think the group is unlikely to make up for such heavy losses.

Worst soybean results ever seen. 

  • Wilmar International (Wilmar) is expected to report a net loss of c.USD230m for the quarter, mainly due to poor performances in the soybean crushing business. This implies that losses from the soybean crushing sub-segment is likely to be northward of USD300m in 2Q16, wiping out the earnings from tropical oils and consumer products. 
  • While management had earlier guided for losses in this sub-segment, this magnitude of losses is unprecedented.

What went so wrong? 

  • While soybean prices soared 30% in 2Q16, we have seen similar spike in soybean prices in 1H12. 
  • While total losses for the segment in 1H12 only amounted to USD92m, 2Q16 losses were significantly larger than our expectations. 
  • Wilmar attributed the losses to untimely purchases of raw materials in this highly volatile market.

Expect recovery in 2H, but inadequate to make up for the losses. 

  • We have begun to see declining soybean prices since 3Q16, which should be favourable for Wilmar. However, we understand from management that quite a lot of the oilseeds’ losses in 2Q16 have already been realised. Thus, we think a margin recovery in 2H will not be sufficient to offset the losses incurred. 
  • Losses for sugar, however, should be reversed in subsequent quarters when harvesting begins.

Downgrade to NEUTRAL (from Buy) with lower SGD3.28 TP (from SGD3.99). 

  • In view of the significant losses in 2Q16, we cut our earnings estimates by 29% for FY16. We also cut our FY17-18 forecasts by 11-13%. 
  • In our SOP valuation, we write-off the entire oilseeds crushing business to reflect uncertainties in this segment despite improving utilisation rates in the industry. 
  • We reduced our TP to SGD3.28 (2% downside), which implies 13.6x FY17F P/E. The risks to our call are volatilities in Wilmar’s soybean and sugar businesses.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-20
RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 3.28 Down 3.99