Wilmar International - UOB Kay Hian 2016-08-12: 2Q16 First Quarterly Loss

Wilmar International (WIL SP) - UOB Kay Hian 2016-08-12: 2Q16: First Quarterly Loss WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - 2Q16: First Quarterly Loss

  • 2Q16 core net loss of US$220m came in as per management guidance. Sales volumes across all divisions showed good growth. The 2Q16 losses were mainly from the manufacturing business within the oilseeds & grains segment and higher losses from sugar milling. 
  • Meanwhile, the tropical oils segment continued to perform satisfactorily. For 1H16, core net profit was US$2.1m (1H15: US$439.1m).
  • Maintain our earnings forecasts. Maintain SELL. Target price: S$3.05.


RESULTS


Results within expectations. 

  • Wilmar International (Wilmar) reported core net loss of US$220m (vs core net profit of US$222m in 1Q16, US$185m in 2Q15) for 2Q16, bringing 1H16 core net profit to US$2m (-99.5% yoy), which is within expectations. 
  • The reported core net loss came in as per management’s guidance in its profit warning on 19 Jul 16 highlighting that its manufacturing business within the oilseeds & grains segment and sugar segment suffered losses in 2Q16. Having said that, we note consumer demand remains resilient with sales volume for tropical oils segment, oilseeds & grains segment and sugar segment showing yoy improvements for 1H16.
  • Wilmar declared an interim dividend of S$0.025/share (1H15: S$0.025), payable on 30 Aug 16.


STOCK IMPACT


Tropical Oils: Downstream division continued to perform. 

  • Performance was within expectation. This division’s profit before tax increased 24.8% qoq to US$186m (+13.6% yoy) for 2Q16, attributed mainly to higher sales volume from the downstream business.
  • PBT margin for 2Q16 was also higher at 4.5% vs 1Q16’s 4.3% and 2Q15’s 4.2%.
  • However, FFB production was lower qoq and yoy mainly due to the lagged impact from drought. For 1H16, profit before tax rose by 10.8% to US$336m.

Sugar: Larger seasonal loss. 

  • Seasonally, sugar operations have always been in the red in 2Q, but loss before tax of US$79m for 2Q16 were larger than that in 2Q15 (loss before tax of US$37m). 
  • The wider losses come as a result of the delay in harvesting in Australia 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.

Oilseeds & grains: First quarterly loss. 

  • The loss before tax of US$344m in 2Q16 was a result of untimely purchases of soybeans in a highly volatile market. The loss was mitigated by stable performance from the consumer products business. 
  • Total sales volume grew 6.5% yoy to 14.1m tonnes for 1H16.

Better performances from JVs and associates. 

  • JV and associates recorded a strong positive contribution of US$32m (>100.0% qoq, loss of US$10.5m in 2Q15) mainly due to better performance from Adani Wilmar (Indian associate), Consumar (sugar associate in Morocco) and African associates.


EARNINGS REVISION/RISK


No change to our earnings forecasts. 

  • We are expecting EPS of 14.0 US cents, 19.2 US cents and 19.6 US cents for 2016-18 respectively, pending outlook guidance from management later at the results briefing.


VALUATION/RECOMMENDATION


Maintain SELL with SOTP-based target price of S$3.05. 

  • This translates into an 11.5x blended 2017F PE (5-year mean 1-forward PE: 12.5x). 
  • Although earnings could improve in the subsequent quarters, regaining investors’ confidence might take a longer time now.


SHARE PRICE CATALYST


Less volatile earnings. 

  • Wilmar is 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 to see a more significant contribution from this segment.




Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-12
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.050 Same 3.050


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