Wilmar - RHB Invest 2016-08-15: After The Beans' Curse

Wilmar - RHB Invest 2016-08-15: After The Beans’ Curse WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar - After The Beans’ Curse

  • We believe Wilmar’s soybean margins in 2H16 will turn around, given the commodity’s declining prices since June. 
  • Management’s tweak in its risk management policy should also minimise the risk of such huge losses in the future. 
  • Tropical oils and consumer products continued to perform in 1H16, and we continue to be positive on the group’s long-term growth story especially in the consumer space. 
  • Maintain NEUTRAL with an unchanged SGD3.28 TP (7% upside), as we do not see any near-term catalyst to rerate share price.

What to expect? 

  • During the analysts’ briefing, CEO Mr Kuok Khoon Hong and CFO Mr Ho Kiam Kong said that Wilmar International (Wilmar) got its soybean trades right eight times out of 10. 
  • We do not expect the group to be right all the time and believe that losses may still occur in the future. However, in the coming quarter, margins should improve. This is because soybean prices have been falling to USD9.99/bushel (from a high of USD11.90) since June. 
  • Wilmar also expects soybean margins to normalise in the full year. In the longer run, we expect growth in consumer products’ volumes and margins to mute the volatilities in the group’s soybean margins.

Downstream business in tropical oils picked up. 

  • We expect Wilmar’s momentum in downstream businesses to continue and FFB production to pick up in the seasonally stronger 2H. This is as 2Q16 pre-tax earnings in tropical oils were in line with our forecast. 
  • While FFB production fell 32%, pre-tax earnings grew 14% YoY on the back of stronger volumes and margins from downstream businesses.

Positive in the long run. 

  • With the new proposed joint venture (JV) between Adani Wilmar and Ruchi Soya Industries (Ruchi), Wilmar will indirectly own a 40% market share in India’s consumer packed oil market. This will make the group a significant packed oil player in the second-largest populated country in the world. 
  • Coupled with potential new consumer products to be put into the available distribution supply chain, we think growth in the consumer space continues to be very exciting for Wilmar.

Lack of short-term catalysts. 

  • However, due to the continued volatilities in the soybean business, we do not see the potential to re-rate the share price in the short term. 
  • We maintain our forecasts and NEUTRAL call, with a SOP-derived TP of SGD3.28 that implies 13.6x FY17F P/E. We think it will be interesting to start looking at this counter if the share price trades closer to SGD3.00.
  • Volatilities in oilseeds and sugar earnings are the key risks to our call.

Juliana Cai RHB Invest | http://www.rhbinvest.com.sg/ 2016-08-15
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.280 Same 3.280