Wilmar International - CIMB Research 2016-08-11: 2Q net losses in line with profit warning

Wilmar International - CIMB Research 2016-08-11: 2Q net losses in line with profit warning WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - 2Q net losses in line with profit warning

  • Wilmar reported its first quarterly net loss of US$220m in 2Q16.
  • This is in line with its guidance and our forecasts, but below consensus.
  • The oilseeds and grains as well as sugar divisions were the key culprits.
  • Better palm and laurics and consumer products unable to offset the huge losses.
  • Maintain Reduce with lower TP, due to concerns over challenging environment.

2Q losses in line with profit warning guidance 

  • Wilmar posted its first quarterly net loss of US$220m in 2Q16, against a core profit of US$222m/US$185m in 1Q16/2Q15, due mainly to losses at its oilseeds and grains (O&G) segment. 
  • The reported net loss was slightly lower than Wilmar’s profit warning guidance of US$230m for 2Q. The losses pushed down 1H16’s core net profit by 99% yoy to just US$2m. 
  • We consider the 1H numbers in line with our full-year net profit forecast of US$804m but below consensus’ full-year net profit estimates of US$943m.

O&G losses due to untimely purchase in a volatile market 

  • The 2Q losses were largely due to the oilseeds and grains division (O&G) which was affected by the volatile soybean market. The O&G division posted a loss before tax of US$344m for 2Q16 and US$175m for 1H16 (2Q15/1H15 profit of US$116m/US$282m).
  • The group revealed that this was caused by untimely purchase of soybean in a highly volatile market, which more than offset the stable consumer products earnings. On top of these, sugar losses more than doubled to US$78.7m (2Q15: losses of US$37.5m).

Cargill also posted losses due to a wrong-way bet on soybeans 

  • Cargill, which competes with Wilmar in some markets, also reported a loss of US$19m for the latest quarter ending May. Cargill said the loss in its origination and processing segment was related to a rally in soybean in April and May, which worked against their view on the soybean market. This is similar to what Wilmar experienced in 2Q for O&G.

Better palm and laurics as well as associates earnings 

  • The tropical oils segment (plantations and palm oil processing) posted a 14%/11% rise in PBT in 2Q16/1H16 to US$186m/US$336m as higher downstream earnings more than offset the 32%/20% drop in FFB output. 
  • Associates contributed higher earnings of US$32m/US$44.5m in 2Q16/1H16, helping to offset losses from other divisions 

Keep interim dividend intact, we project a better 2H16 

  • Wilmar proposed an interim dividend payment of S$0.025 for 1H16, unchanged from the previous year. This is a pleasant surprise given the much weaker 1H16 earnings. We project 
  • Wilmar delivering a stronger 2H performance as we expect its O&G and sugar divisions to return to profitability from 3Q onwards. This is broadly in line with the group’s guidance for a satisfactory performance for the rest of the year.

Maintain Reduce with a lower target price 

  • Wilmar’s share price has fallen 7.8% since Wilmar released its profit warnings. The market appears to have priced in the losses in 2Q judging from the S$1.6bn (US$1.2bn) drop in its market capitalisation. However, we keep our Reduce call with a lower SOP-based target price (S$3.05, widened discount to 15% from 10% to reflect the challenging market environment). 
  • Key risks are stronger earnings.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-08-11
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 3.05 Down 3.230