Wilmar International - CIMB Research 2016-08-14: Growth potential in consumer products

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Growth potential in consumer products

• We are more positive on Wilmar’s outlook following management’s guidance for a better 2H16.
• The huge losses in oilseeds and grains are a one-time event.
• Wilmar will tweak risk management policy to reflect higher volatility in the market.
• Future growth will come from its plans to grow its consumer products segment.
• Maintain Reduce with TP of S$3.05 due to unexciting near-term prospects.

Main takeaways from 2Q16 briefing 

• The key takeaways from Wilmar’s 2Q16 results briefing are:
  1. losses in 2Q are a onetime event;
  2. guidance for 2H earnings to be satisfactory compared to past years;
  3. may tweak risk management policy to reflect higher volatility encountered in the market recently;
  4. no plans to list or separate its consumer products segments from its other divisions for now; and
  5. sees highest potential for growth in the consumer product business.
• Overall, we are slightly more positive due to the guidance for a better 2H.

Huge losses in oilseeds and grains explained 

• Wilmar said the large losses of US$344m in its oilseeds and grains division in 2Q16, were a one-time event and due to untimely purchase of soybeans in a highly volatile and disruptive market. 
• The group shorted soybeans (raw materials for its crushing business in China) in 2Q, but prices went against its view due to weather events in Argentina and the US, which led to the losses. It expects to recover some of the losses in 2H16.

Consumer products segment offers highest growth potential 

• Wilmar revealed that the 2Q losses have not shaken its confidence in the group’s integrated agribusiness model, in light of its dominance in processing and distribution of staples food products, namely cooking oil, rice and flour. 
• The group expects refining and crushing margins to be reasonable, though not as good as before due to overcapacity in the industry. It sees the biggest growth potential in the consumer products division. Its proposed JV with Ruchi Soya will boost its consumer products exposure in India.

Comparing our earnings forecasts against broad 2H guidance 

• The group said it expects 2H16 earnings to be satisfactory compared to past years’ earnings for the same period. Wilmar posted core net profits of US$710m, US$842m and US$743m in 2H15, 2H14 and 2H13, respectively. 
• Our forecast of US$802m for 2H16 is broadly in line with its historical achievement though on the higher end of the range as we expect stronger palm and laurics, as well as sugar performances.

Other interesting points from the briefing 

• The group said there are no plans to unlock value of its consumer products division in the near term. 
• Wilmar said the weaker Chinese demand for palm oil in 1H16 was due to destocking activities by the government and local players, as well as the uncompetitive pricing of palm oil against other edible oils.

Maintain Reduce due to unexciting near-term earnings 

• We maintain our earnings forecasts, target price of S$3.05 (based on a 15% discount to SOP) and Reduce call. 
• We are positive on the group’s long-term prospects and its plans to expand its consumer product business over time, but this is overshadowed by nearterm unexciting earnings. 
• Key risks are stronger-than-expected earnings.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-08-14

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 3.050 Same 3.050