Wilmar International (WIL SP) - UOB Kay Hian 2016-11-14: Sales Volume To Drive 4Q16 Earnings

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Sales Volume To Drive 4Q16 Earnings

Post results briefing, we expect 4Q16 earnings to be better qoq, driven by higher sales volume.
The sugar harvesting season is delayed by wet weather in 3Q16, palm oil production in Indonesia is expected to be flat or slightly higher qoq and the early Chinese New Year in 2017 is likely to boost oilseeds & grains sales volume.
We reduce our net profit forecast for 2016 by 8.8% as the sugar processing segment performs below our expectation.

As mentioned in our earlier note, we now reduce our 2016 net profit forecast by 8.8% as we had expected higher margins from the sugar division given strong sugar prices. We are expecting 4Q16 net profit to be 9-13% higher qoq. 3Q is usually the peak earnings quarter for Wilmar.

Post results briefing, we believe Wilmar International (Wilmar) is able to deliver another good quarter in 4Q16 as management sees higher sales volumes driven by:
1. Unusual higher sugar milling volume in 4Q16. The harvesting of sugarcane usually in November is likely to be delayed to December for this year due to wet weather at the start of harvesting season. However, we reduce our contribution forecast from the sugar division for 2016 as margins lag expectations. However, given the group’s large exposure to sugar, management explained that it is a better strategy to hedge its position as sugar prices go up. The current high prices are likely to translate into good sugar earnings for 2017.
2. Tropical Oil to be supported by higher production volume from Indonesia. 4Q16 earnings will be supported by the pick-up in palm oil production in Indonesia (expecting Oct-Nov 16 production to be good as well) and better refining margins in 4Q16 (volume pick-up due to lesser competition to secure feedstock).
3. Oilseeds & Grains to be supported by festive demand. Consumer pack sales volume is expected to stay high in 4Q16 as Chinese New Year (CNY) in 2017 is in lateJan 17 vs the usual February. Thus, preparations for CNY will start early in 4Q16.
Management concurred with Bunge’s view that China’s soybean crushing margins has improved.

In the latest Pertamina’s biodiesel procurement for Nov 16 to Apr 17, Wilmar was awarded 587,565kl, lower than the 680,064kl in the previous six months due to an increased number of producers.
Although the volume from Pertamina is lower, Wilmar also supplies biodiesel to the nonsubsidised segment (non-PSO). Wilmar is the world’s largest palm-based biodiesel producer.

Wilmar is taking advantage of the lower tax rate of 3% on revaluation gains to revalue its assets in Indonesia. This exercise will allow Wilmar to report a lower effective tax rate with the booking of deferred tax income. Thus, 4Q16 effective tax rate could be significantly lower. However, management has yet to decide whether to book all tax credit all at once or to stagger them.

Reduce 2016 net profit forecast by 8.8%, maintain 2017-18 forecasts.
We reduce our PBT margin for the sugar division to 2.2% (from 3.9%)y and the sales volume growth for sugar merchandising & processing to 5% (from 15%).
Other forecasts remain unchanged.

Maintain SELL and SOTP-based target price of S$3.05. This translates into 11.5x blended 2017F PE (5-year average forward PE: 12.5x).
We believe Wilmar’s share price rebound from the recent low of S$3.05 after Wilmar issued a profit warning for its 2Q16 results has largely priced in the stronger 3Q16 performance and expected steady 4Q16 earnings.

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-14

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