Wilmar International - UOB Kay Hian 2016-08-15: Business As Usual Now

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Business As Usual Now

Wilmar’s business operations are back to normal after posting losses in 2Q16 due to its wrong market view on soybean. Soybean prices weakened in 3Q16, which showed that its view was right, while its timing was wrong.
Bad weather affected its upstream production; this will be offset by better contributions from downstream operations and Consumer Pack. However, trading risk remains a concern for now.

Management explained that soybean market in 2Q16 was against the fundamental, ie substantial global supply due to a surge in commodity funds bet on potential crops losses due to unfavourable weather in Argentina and later La Nino on the US soybean season.
Wilmar is not alone on this though; Cargill also reported a loss of US$19m for the latest quarter ending May and 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.

After the strong price surge, soybean prices did correct by 15-20% since its peak in mid-Jun 16. Wilmar’s view of soybean being overpriced is accurate, except for a different timing. However, during the briefing, management did mention that some of the trading losses have been recovered in 3Q16.
3Q16’s soybean crushing margins are slightly better than that of 2Q16, which should lead to a much better set of results in 3Q16. In addition, the festive seasons in China should boost Consumer Packs’ sales volume and margins.

Wilmar’s business operation is largely on mid and downstream processing, and timing of sourcing of feedstocks is a day-to-day decision. Management mentioned that since its listing, this is the first year that the company has encountered such large trading losses of close to US$400m.
Management reckons that its trading strategy and risk control will need to be tweaked amid the highly volatile market, and going forward, will reduce its market position during the crop growing season.

Wilmar’s Tropical Oils division was still able to post 14% PBT growth in 2Q16 and 11% PBT growth for 1H16 as compared with most commodity trading & processing companies and plantation companies which posted much lower earnings vs a year ago. This is attributable to its integrated business models which allow it to capture the full value chain and enjoy a lower cost of operation with its large scale of economic.

Dry weather in Malaysia and Indonesia have led to lower-than-expected palm oil production Management has revised down production growth guidance for both fresh fruit bunches (FFB) and sugar. For 2016, FFB production guidance has been revised down to -15% to -20% from flat previously. This does not come as a surprise to us as we have seen all plantation companies revising this down during their respective 2Q results announcement.
All plantation companies have gotten the production trend right, but the FFB yields decline are more severe than expected¸ with some companies classifying this as the worst ever seen.

Meanwhile, sugar production is also expected to be lower by 2% as sugar yield was affected by heavy rainfall in Queensland, Australia.
Contributions from Merchandising, Refining and Consumer pack should report better contribution on the back of higher sales volume. In 2Q16, the sugar division also reported mark-to-market losses but these losses will be reversed when deliveries of sugar commence once the milling season starts in 2H16.

No change to our earnings forecasts. We are expecting an EPS of 14.0 US cents, 19.2 US cents and 19.6 US cents for 2016-18 respectively.

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.

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 from this segment.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-15

UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.000 Down 3.050