Wilmar International - UOB Kay Hian 2017-02-01: 4Q16 Results Preview ~ Expect In-line Net Profit; ADM’s Stake Increase Boosts Investor Confidence

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - 4Q16 Results Preview ~ Expect In-line Net Profit; ADM’s Stake Increase Boosts Investor Confidence

We expect Wilmar to report a stronger net core profit of US$430m-460m on:
1. higher margins and sales volumes from tropical oils as well as the oilseeds and grains divisions; and
2. profit recognition from the sugar division, which had been delayed.

We think current share price should have factored in the earnings recovery and good commodity prices.
Maintain SELL with a higher target price of S$3.50 (after 9- 11% upward profit adjustments).

In 2016, 4Q16 was likely to have been the strongest quarter in terms of core net profit for Wilmar International (Wilmar) vs the seasonal peak of 3Q as:
1. sugar harvesting was delayed to early-Jan 17 so 4Q16 would have registered a higher crushing volume vs 3Q16,
2. palm oil production volume picked up strongly in 4Q16 as 9M16 suffered a severe drought impact from 2015’s EL Nino, and
3. utilisation rate for soybean crushing was high. This could bring in better margins.
4Q16 net profit is expected to have factored in deferred tax income arising from the increase in tax depreciable value of its plantation assets. Results are scheduled to be released on 20 Feb 17 after market close.

We believe investors’ confidence will improve after Archer Daniels Midland Company (ADM) further increased its stake in Wilmar. ADM acquired an additional 50m shares (at S$3.6834/share) on 16 Jan 17 from Wilmar to raise its stake to 23.94% (from 23.15%).
We think current share price should have factored in the earnings recovery and good commodity prices.

This division is expected to deliver healthy quarterly earnings again on the back of a higher utilisation rate for soybean crushing in China and also a rise in festive sales for consumer packs.
Front-loading of Chinese New Year demand also contributed to the division’s higher sales volume in 4Q16. However, this implies 1Q17 consumer pack sales volume could be lower.
Based on industry data, China’s soybean crushing utilisation rate rose from an average of 60% in 3Q16 to about 70% in 4Q16. The higher utilisation rate was mainly due to better soymeal prices in China which led to better margins.

The sugar division is likely to have delivered higher earnings contribution (on a yoy and qoq basis) in 4Q16 on the back of an increase in milling volume.
Milling volumes usually peak in 3Q, but 2016 saw an exception to this seasonal effect with adverse weather delaying harvesting all the way to early-Jan 17 (vs the norm of end-November). The merchandising and processing division is expected to continue to deliver strong sales volume and better yoy and qoq margins.

This division should report a better yoy and qoq PBT for 4Q16 (4Q15: US$112m, 3Q16: US$169m), supported by higher sales volume and better margins.
Sales volume growth in this segment was largely driven by significantly higher palm oil production in 4Q16.
For 9M16, this division reported a slight decline in sales volume (-1.6% yoy), but 4Q sales volume should allow Wilmar to report positive sales volume for 2016.
Indonesia reported strong 4Q16 production (estimated +11.6% qoq), especially from Kalimantan. This would have boosted Wilmar’s processing and sales volume in 4Q16. As such, Wilmar’s processing plants are likely to see better utilisation rates and palm product prices should see a sharp hike. This should enhance margins as Wilmar had secured feedstock way ahead of time.

We raise 2017-18 net profit forecasts by 11% and 9% respectively to factor in higher margins for the tropical oils and sugar divisions.
We raise our pre-tax margin assumption for the tropical oil division as the recovery in production should allow refinery operations to source feedstock more effectively.
Sugar prices have held well at above 18 US cents/lb for longer than expected. This should be positive for Wilmar’s sugar milling and refining margins.
We are now expecting EPS of 12.8 US cents, 20.6 US cents and 21.6 US cents for 2016- 18 respectively.

Maintain SELL with a higher SOTP-based target price of S$3.50, up from S$3.05, after profit forecast adjustments. This translates into 12.1x blended 2017F PE, which is close to its 5-year mean (1-year forward PE of 12.5x).

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-01

UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.50 Up 3.050