Wilmar International (WIL SP) - UOB Kay Hian 2016-11-02: 3Q16 Results Preview ~ Performance Should Be Back On Track

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - 3Q16 Results Preview ~ Performance Should Be Back On Track

• Wilmar is expected to announce its 3Q16 results on 10 Nov 16 after market close, and we are not expecting any negative surprises. We estimate 3Q16 core profit at US$350m-400m (vs 3Q15’s US$359m). 
• Oilseeds & grains should swing back to profit as per guidance given during the 2Q16 briefing in Aug 16. Higher contributions are expected to come from Tropical oils (better margins) and Sugar (crushing season started). 
• Maintain SELL. Target price: S$3.05.

WHAT’S NEW

3Q16 results preview: Expecting core net profit of S$350m-400m. 

• After the negative surprise losses in 2Q16, we are now expecting Wilmar to report a core net profit of US$350m-400m when it announces its 3Q16 results on 10 Nov 16.
• Expectations for the upcoming 3Q16 results announcement are: 
  1. Oilseeds & Grains: To deliver profit. This division is expected to deliver better qoq profit after the surprise losses in 2Q16. Earnings in 3Q16 will be driven by: 
     1. higher sales volume and margins as 3Q usually sees better demand in China. 3Q16 margins were also partly boosted by lower raw material prices, 
     2. recovery of some trading losses in 2Q16, and 
     3. steady soybean crushing margins.
  2. Sugar: To report positive contributions as crushing season starts. The sugar division usually contributes the most to total net profit in 3Q as the sugar milling and crushing seasons starts late-May and ends in October/November. For 3Q16, contributions from Sugar milling are likely to be lower yoy due to lower production volume (sugar yield affected by adverse weather) and also the delay in the harvesting season. The crushing season from 2016 is likely to extend into Dec 16 vs the usual early-mid November due to the wetter weather at the start of the season.
     Merchandising & Processing is expected to continue to deliver strong sales volume and better margin yoy and qoq.
  3. Tropical oils overall should be better yoy, but it was a challenging quarter for refiners. Upstream operation will undoubtedly report a good set of results on the back of better sales volume and pricing, but downstream operations are facing different challenges in different markets.
     In 3Q16, Indonesia-based refiners suffered from lower margins as they competed to get feedstock by offering better pricing for CPO. In 3Q16, CPO prices in Indonesia were higher than in Malaysia. Malaysia operations performed relatively better. Wilmar has larger downstream operations in Indonesia.

EARNINGS REVISION/RISK

10-15% downside risk to our current 2016 earnings forecast. 

• Our net profit estimate of US$899m for 2016 might be too optimistic. Our current 3Q16 core profit forecast is lower than that three months ago as margins for tropical oils were affected by the higher CPO prices in Indonesia and lower sugar sales volume.
• Maintaining earnings estimate pending 3Q16 results announcement and guidance for 4Q16. We are expecting an EPS of 14.0 US cents, 19.2 US cents and 19.6 US cents for 2016-18 respectively.

VALUATION/RECOMMENDATION

• 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.
• Our SOTP-based target price is based on 2017 net profit forecast. Any change to 2016 earnings will not have an impact on our target price of S3.05.

SHARE PRICE CATALYST

Less volatile earnings. 

• 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/ 2016-11-02

UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.050 Same 3.050