Wilmar International - CIMB Research 2016-11-12: Tax credit to help boost 4Q16

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Tax credit to help boost 4Q16

• We are more positive on Wilmar’s outlook following management’s guidance for a decent 4Q16 and a potential tax credit.
• The operating environment of the oilseeds crushing business in China has improved.
• Its tropical oils division could benefit from higher volumes and CPO prices.
• The group could recognise a one-off tax credit from revaluation of assets in 4Q16.
• Upgrade to Hold from Reduce with higher TP of S$3.42.

Main takeaways from 3Q16 briefing 

• The key takeaways from Wilmar’s 3Q16 results briefing are: 
  1. operating environment for the oilseeds crushing business in China has improved; 
  2. guided for satisfactory 4Q earnings; 
  3. expects better sugar profits in 4Q;
  4. tropical oils to benefit from higher palm oil supply and prices; and 
  5. may book tax credit in 4Q from revaluation of assets.

Potential boost from tax credit in 4Q 

• Wilmar revealed that it has revalued some of its plantation and processing assets in Indonesia to take advantage of the lower 3% tax rate on revaluation gains, instead of 10%. This exercise will allow Wilmar to benefit from lower income taxes and book in some deferred tax income upfront. 
• It expects to book some of these benefits in 4Q and has indicated that this could be significant. 
• We have not imputed the expected tax credit in 4Q16 into our projected 25% effective tax rate for FY16, down from 33% in 9M16.

Better days ahead for crushing business in China 

• We gather that the operating environment for the oilseed crushing business in China has improved following the merger of Chinatex and COFCO. The tropical oils business will do better as palm oil supply recovers from the El Nino effect and higher CPO prices.

Stronger sugar earnings in 4Q16 

• The sugar division is expected to perform better in 4Q16 due to higher sugar sales volume and prices. We gather that heavy rain in 3Q delayed sugar harvesting activities in Australia to 4Q16. 
• The consumer products business continues to flourish in the rice and flour segments in China. The group is registering strong growth for its consumer products business in India, Vietnam, Indonesia and Africa.

Other interesting points from the briefing 

• The group said that it will consider selling its palm oil estates if a good offer comes along. The poor Chinese demand for palm oil in 2016 was due to destocking activities by the government and local players as well as release of state reserves of rapeseed oils.

Comparing our earnings forecasts against broad 4Q guidance 

• The group said it expects 4Q16 earnings to be satisfactory. Wilmar posted core net profits of US$350m, US$412m and US$353m in 4Q15, 4Q14 and 4Q13, respectively.
• Our forecast of US$417m for 4Q16 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 

Upgrade to Hold on better earnings prospects 

• We maintain our earnings forecasts but raise our target price to S$3.42 as we lower the discount to SOP from 15% to 10% (to reflect better earnings prospects) and roll over our valuations to end-17. 
• We upgrade the stock to Hold from Reduce as we turn more positive on the group’s prospects. Share price supported by its P/BV of 0.9x.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2016-11-12

CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 3.42 Up 3.050