Wilmar International - CIMB Research 2017-02-21: Growth opportunities beckon in China

Wilmar International - CIMB Research 2017-02-21: Growth opportunities beckon in China WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Growth opportunities beckon in China

  • We are positive on the Wilmar International's plan to expand processing capacities in China.
  • 1Q17 crush margin is good but not as strong as 4Q16.
  • Biodiesel profit may be negatively impacted by potential changes in pricing formula.
  • Targeting FFB output growth of 5-10% in FY17.
  • Maintain Hold call with an unchanged SOP-based target price of S$3.93.

Key takeaways from 4Q16 results briefing 

  • The main takeaways from its 4Q results briefing: 
    1. it is keen to expand oilseeds and grains capacities in China after restrictions on oilseeds and grain processing for foreign companies were lifted; 
    2. 1Q17 crush margin is good but not as strong as 4Q; 
    3. positive on 2017 prospects and sees growth in sugar, consumer products (rice and flour) and specialty fat businesses; 
    4. targets 5-10% FFB output growth for 2017 and 
    5. does not expect future deferred tax credit recognition to be significant vs. 4Q16’s US$142m.

Growth opportunities in China 

  • Wilmar is keen to grow its oilseeds and grains business in China after the recent lifting of restrictions on foreign companies. Its rice and flour processing facilities are running at full capacity while crushing plants’ average utilisation rate is around 70% in 2016. Thus, we view the ruling as positive for Wilmar as it allows the group to expand capacities and grow operations and earnings in China. 
  • We gather that the operating environment for the oilseed crushing business has improved after the merger of Chinatex and COFCO.

Higher CPO output but leaner biodiesel profit margin? 

  • Wilmar targets 5-10% FFB output growth in FY17, driven by a 10-15% rise in FFB yields. 
  • There are ongoing discussions in Indonesia to potentially cut the cost of converting palm oil to biodiesel in the pricing formula for biodiesel from US$125/tonne to US$100/tonne. We think this could lower profit margins for biodiesel, though this could be compensated by higher sales volumes. 
  • Indonesia plans to expand its biodiesel usage to the non-PSO sector which could raise consumption from 2.7m kls in 2016 to 4.6m kls in 2017.

Other interesting points from the briefing 

  • The group indicated higher capex in 2017 than the last two years as it looks to expand operations. 
  • Wilmar revealed that it has revalued some plantation and processing assets in Indonesia to take advantage of the lower 3% tax rate on revaluation gains (vs. 10%). This allowed Wilmar to recognise tax credit of US$142m in 4Q16. Future recognition of tax credit is not expected to be significant. 
  • It views Archers Daniels Midland, which has raised its stake in Wilmar to 23.94% from 20%, as a strategic partner and investor.

Maintain Hold, expect decent 1Q17 earnings 

  • We project 1Q17 results to be decent but not as strong as 4Q16 due to negative sugar contributions (seasonal factors) and absence of gains on deferred tax assets. 
  • We maintain earnings forecasts and SOP-based target price of S$3.93. 
  • We project stronger earnings in 2017 on the back of stronger oilseeds and grains contributions. 
  • Maintain Hold as share price supported by its P/BV of 1.2x. 
  • Key upside risk is higher processing margins for its key products while downside risk is untimely purchase of raw materials.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2017-02-21
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