Wilmar International - DBS Research 2016-10-24: Earnings recovery priced in

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Earnings recovery priced in

Navigating volatility. 

• China’s decelerating economic growth means that Wilmar is focused on expanding margins within its product portfolio. 
• Over the long term, we expect Wilmar to gradually extend penetration of well-established brands through its vast existing distribution networks in Asia’s growing markets. 
• In this report, we reiterate our HOLD call on the counter.

Earnings and TP adjusted slightly. 

• Revisions to our CPO/soybean prices and currencies had slight impacts on Wilmar’s forecast earnings. 
• Maintaining zero pretax margin assumption for Oilseeds & Grains segment this year, sugarcane yields of 70 MT/ha and sugar extraction rate of 13%, we adjusted Wilmar’s FY16F/17F/18F net earnings by 5%/4%/4%. 
• We expect the group’s 3Q16 earnings to revert into the black at between US$258m and US$291m – premised on higher Tropical Oil volumes and flat pretax margins, as well as seasonal peak contribution from sugar segment; while Oilseeds & Grains are forecast to deliver US$125m pretax.

Lacking catalysts. 

• We do not anticipate catalysts that would move the stock significantly higher in the near term; given a heightened risk profile following significant 2Q16 losses. 
• Notwithstanding continued biodiesel allocation in Indonesia; expansion of India presence (through Adani-Wilmar’s proposed JV with Ruchi); and gradual penetration of well-established brands – including that of Goodman Fielder – in China; Wilmar’s FY16F-19F earnings are expected to expand at a c.11% CAGR (low-base effect).

Valuation

• We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.39 (WACC 7%, TG 3%) – upgraded from our previous TP of S$3.13 – offering 3% potential upside to our revised TP.

Key Risks to Our View

• Wilmar’s share price is influenced by palm oil refining/soybean crushing margins on top of CPO/sugar price expectations. 
• There would be downside risk to our CPO price forecasts if Pertamina’s biodiesel off-take fails to live up to our expectations (3.7m MT) next year. 
• As Wilmar is an index component, changes in its weightings would also make it vulnerable to swings significantly above or below our TP.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-10-24

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.39 Up 3.130