Wilmar International - UOB Kay Hian 2016-07-20: Surprise Profit Warning ~ Expect Net Loss Of US$230m For 2Q16

Wilmar International - UOB Kay Hian 2016-07-20: Surprise Profit Warning: Expect Net Loss Of US$230m For 2Q16 WILMAR INTERNATIONAL LIMITED F34.SI 

Wilmar International (WIL SP) - Surprise Profit Warning: Expect Net Loss Of US$230m For 2Q16

  • Wilmar issued a profit warning ahead of its scheduled 2Q16 results announcement on 11 Aug 16. 
  • Wilmar is expected to report net losses of approximately US$230m for 2Q16, largely attributed to the manufacturing sub-segment within oilseeds and grains and partially to the sugar segment. 
  • Meanwhile, the tropical oils segment and consumer products subsegment continued to perform satisfactorily. 
  • We cut our 2016-17 profit estimates by 31% and 17%. 
  • Downgrade to SELL. Target price: S$3.05.



WHAT’S NEW


Profit warning is a surprise. 

  • Wilmar International (Wilmar) issued a profit warning and is expected to report net losses of approximately US$230m for 2Q16, largely attributed to the manufacturing subsegment within the oilseeds and grains segment and partially to the sugar segment. Meanwhile, the tropical oils segment and consumer products sub- segment continued to deliver satisfactory performances. This was not expected by the market as well. As such, we should see a selldown on this announcement.

Big surprise - Soybean operations in the red. 

  • This came as a big surprise, although we were expecting an overall lower qoq and yoy 2Q16 net profit for Wilmar due to weak soybean crushing margins. The expected losses in 2Q16 were largely attributed to soybean operations, which we believe is linked to trading losses. 
  • Management does not foresee a strong rebound in soybean prices after two consecutive years of oversupply. Thus, some trading positions might not be well covered. Soybean prices appreciated by close to 35% in 2Q16 on the concern of potentially lower supply as production might be hit by the upcoming La Nina. 
  • We have revised down our PBT margin forecasts for Oilseeds and Grains to factor in the expected losses in 2Q16 and expect margins will continue to be low in 2H16 as soybean crushing margins in the industry are still loss making.

Sugar losses in 2Q16 are seasonal but expected to be larger yoy. 

  • Management also highlighted losses from Sugar operations could be larger than that in 2Q15, although seasonally this quarter has always been in the red. The expected wider losses come as a result of the delay in harvesting due to rainy weather and accounting mark-to-market (MTM) losses on hedges which come on the back of higher sugar prices. 
  • In the past, the delay in harvesting in 2Q would usually lead to better 3Q figures, but this year, overall earnings from milling might not be as good as we expected due to lower production as a result of the El Nino. 
  • Dry weather in Australia has led to lower sugar yields and will likely lead to lower sugar production in Australia. We have revised down our 2016 sugar sales volume and margin forecasts for milling operations.


EARNINGS REVISION/RISK


Cut earnings forecast. 

  • We cut our earnings estimates by 31%/17%/18% for 2016/17/18. We now expect an EPS of 14.0 US cents, 19.2 US cents and 19.6 US cents for 2016-18 respectively.


VALUATION/RECOMMENDATION

  • Downgrade to SELL from BUY with a lower SOTP-based target price of S$3.05 (previous: S$3.80) after our earnings adjustments. This translates into a 11.5x blended 2017F PE (5-year mean 1-forward PE: 12.5x). 
  • Although earnings could improve in the subsequent quarters, regaining investors’ confidence (previously large earnings disappointments were in late 2011 and 2012) might take a longer time now.


SHARE PRICE CATALYST


Less volatile earnings. 

  • Wilmar is now focusing on expanding its consumer packs business to have it stand as a more stable earnings contributor. This expansion is progressing well but it will still take a few years for Wilmar to see a more significant contribution.




Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-20
UOB Kay Hian SGX Stock Analyst Report SELL Downgrade BUY 3.05 Down 3.95


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