Wilmar International - DBS Research 2016-11-11: Strong earnings recovery priced in

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Strong earnings recovery priced in

3Q16 core earnings of US$384.9m ahead of our expectations.
Sequential recovery driven by Oilseeds & Grains, seasonal Sugar contribution, Shipping & Fertiliser, and Associates.
4Q16 earnings outlook expected to remain favourable.
HOLD rating and TP maintained.

Core 3Q16 earnings of US$384.9m (+10% y-o-y against restated US$350.4m) were better than the US$258mUS$291m range we had projected. This brought the group’s core 9M16 earnings to US$387.1m – representing 46%/43% of our/consensus full-year targets.
Reported 3Q16 earnings came in at US$392.2m (+47% y-o-y against restated US$267.6m) – which included US$7.4m of gains arising from investment securities; partly offset by FX losses recognised on intercompany loans.

Oilseeds & Grains delivered strong pretax of US$248.1m (+2% y-o-y) – against US$125.4m expected. We suspect a drop in soybean origination costs had boosted crushing margins; while Consumer products’ margins may have stayed relatively strong. This was partly offset by lower-than-expected US$169.3m pretax from Tropical Oils (+61% y-o-y) – against US$204m forecast.
While the group credited downstream business’s good performance, we suspect refining sub-segment may have lagged our expectations.
Plantations sub-segment FFB yields (-18% y-o-y) were still adversely affected by El Nino; although we understand higher ASP worked to partly compensate the impact.
Sugar segment also reported better-than-expected seasonal pretax recovery to US$86.4m (-21% y-o-y) – vis- à-vis US$46.1m forecast – thanks to sequential recovery in prices.
3Q16 results were further boosted by strong pretax from other segment (i.e. shipping and fertiliser), which delivered US$35.2m – against US$12.1m expected.

Tropical Oils pretax margin/MT came in at US$29 (+73% y-o-y) – against our FY forecast of US$32. This was on the back of improved contribution from downstream operations. Wilmar’s announced biodiesel allocation for November 2016 through April 2017 amounted to 587k kl – representing a slight decline from 667k kl in the previous six months due to increased number of producers.
Oilseeds & Grains pretax margin/MT for the quarter was booked at US$31 (+3% y-o-y) – against our estimate of US$17.

Boosting the improved operating results, Wilmar booked a 94% y-o-y jump in share of results from associates and JV, mainly on account of strong contributions from associates in China, Africa and Ukraine.
In non-operating items, Wilmar also recognised US$7.4m of net gains primarily from investment securities, partly offset by FX losses recognised on inter-company loans.
Interest income also dropped 67% y-o-y on lower deposits placed and corresponding borrowings.

Ending cash & cash equivalents remained sequentially stable at US$3.8bn (-41% y-o-y). Gross debts had dropped 26% q-o-q (flat y-o-y) to US$15.9bn. Stripping out liquid working capital, this translates to reported net gearing ratio of 39% (79% including liquid working capital) – down from 46% in the previous quarter.
Cash flow from operations amounted to US$543m for the quarter – higher than reported net profit, due largely to increase in payables; offset by liquidation of inventory and receivables. 3Q16 capex amounted to US$180m vs. US$226m in the previous quarter.

Given the continued drop in soybean origination costs in 3Q16, we expect the group’s oilseed crushing subsegment pretax to remain firm in 4Q16 – backed by record US harvests. Yet, slow farmer selling might increase origination cost from South America in 1Q17.
We expect Wilmar’s 4Q16 Tropical Oils segment pretax contribution to also improve on the back of both higher ASP and volume.

We are maintaining our forecasts as well as our fair value estimate of S$3.39. We do not expect any significant near-term upside catalyst that would propel the counter’s valuation well above our TP.
Maintain HOLD.

Ben Santoso DBS Vickers | http://www.dbsvickers.com/ 2016-11-11

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.390 Same 3.390