Wilmar International - DBS Research 2017-02-17: Focus on margins

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Focus on margins

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.

Revisions to our CPO/soybean price forecasts and currencies positively impacts Wilmar’s earnings. We adjusted Wilmar’s FY16F/17F/18F net earnings by +6%/+9%/+8%.
We expect the group’s oilseed crushing subsegment pretax to remain firm in 4Q16 – backed by record US harvests.
Wilmar’s 4Q16 Tropical Oils segment pretax contribution should likewise sequentially improve on the back of both higher ASP and volume.
Given delayed harvesting in 3Q16; we also expect part of sugar seasonal pretax peak to spill over into 4Q16.

We do not anticipate catalysts that would move the stock significantly higher in the near term. We believe the sequential recovery in 3Q16 earnings is already priced in.
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).

We employed DCF methodology (FY17F base year) to arrive at our TP of S$3.90 (WACC 7%, TG 3%) – revised up from S$3.39 previously.

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/ 2017-02-17

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.90 Up 3.390