Wilmar International (WIL SP) - UOB Kay Hian 2017-03-29: Core Businesses Remain Intact; Upgrade To HOLD After Recent Share Price Correction

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Core Businesses Remain Intact; Upgrade To HOLD After Recent Share Price Correction

• We upgrade Wilmar to HOLD from SELL after its recent share price correction.
• Meanwhile, core businesses are still operating as usual and we expect better 2017 earnings on the back of steady growth from all three key divisions on higher sales volumes. Being a seasonally soft quarter, 1Q17 performance is likely to be weak qoq. 
• Our SOTP-based target price remains at S$3.50. Entry price: S$3.20.

WHAT’S NEW

Upgrade to HOLD after recent share price weakness. 

• Wilmar International’s (WIL) share price has fallen 11.6% from a high of S$3.98 on 2 Jan 17 to S$3.52 yesterday. The drop is possibly due to weakening commodity prices. 
• Sugar prices dropped the most (- 14.1%), followed by CPO spot prices and soybean prices which dropped 11.6% and 6.1% respectively from 2 Jan 17 to yesterday.

Explaining the drop in commodity prices. 

• Sugar prices were weighed down by ample supply but weaker demand. 
• The weakening CPO prices were mainly due to the market expecting a strong production recovery but demand growth is lagging. 
• The dip in soybean prices was largely due to better-than-expected production in South America, and the expected higher soybean planting in the US as well. 
• Last week, Oil World raised its soybean production forecasts for South America to 177m tonnes, up 5.2m tonnes or 3% from its previous estimate a month ago.

Wilmar’s core operations are expected to deliver stable performances in 2017. 

• We think Wilmar’s recent share price correction was driven by poor sentiment on weakening commodity prices. However, Wilmar’s core businesses are still operating as usual and we expect all three key divisions to grow steadily in 2017, supported by higher sales volumes.

1H is usually weaker than 2H for Wilmar. 

• Historically, Wilmar’s earnings mix in 1H and 2H of the year was 40%:60%. We are expecting 1Q17 to be Wilmar’s weakest quarter for the year due to: 
  1. weaker demand for consumer products post-Chinese New Year (CNY), 
  2. lower soybean crushing margin due to slowdown in demand, 
  3. weaker qoq FFB production due to seasonality, and 
  4. weaker contribution from the sugar division as sugar milling activity should only start contributing from 2H17 as the sugar cane crushing season in Australia only starts in 2H.

STOCK IMPACT

Tropical Oil. We expect a weaker performance in 1Q17.

• Weaker upstream production on lower qoq production in 1Q17 due to seasonality.
• Lower palm product prices will also lead to a weaker qoq performance from this division.
• Weaker qoq palm refining margin in 1Q17, mainly due to more intense competition to secure feedstock in a seasonally low production period.

Oilseeds & Grains is likely to see a weak performance.

• Lower demand. Demand for consumer products is expected to be weaker post CNY.
• Demand for CNY was front loaded to Dec 16 with CNY in January this year vs February in 2016. Thus, 1Q17 sales volume for consumer products is expected to be lower yoy.
• Weaker soybean crushing margin. Management indicated that soybean crushing margin is expected to remain good in 2017 but could drop qoq in 1Q17 as demand slows down post CNY. This division should see improvement in 2H16 on higher festive demand.

Sugar: Low season. 

• 1H is generally the low season for sugar as contribution from the milling segment will only kick in from 2H when the cane crushing season starts. This division’s performance will be supported by higher sales volume for merchandising & processing segment for the year.
• FFB production to improve in 2017. To recap, management is expecting FFB production growth of 5-10% yoy in 2017 and the bulk of production is expected to come from 2H17, in line with industry trend. 
• Production in 2017 is likely to be marginally lower than 2015’s level. We are expecting average CPO price of RM2,600/tonne for 2017.

EARNINGS REVISION/RISK

Maintain earnings forecasts for 2017-19. 

• We maintain our EPS forecasts of 20.6 US cents, 21.6 US cents and 22.7 US cents for 2017-19 respectively.

VALUATION/RECOMMENDATION

• Upgrade to HOLD and maintain SOTP-based target price at S$3.50. This translates into 12.1x blended 2017F PE, which is close to its 5-year mean (1-year forward PE of 12.5x). The upgrade reflects stable earnings expectations. 
• Entry price is S$3.20.

SHARE PRICE CATALYST

• Stronger-than-expected earnings growth.
• Weather-induced commodity price hikes.
• Full implementation of the biodiesel mandates globally could lead to better demand for biodiesel (Wilmar is the world’s largest palm biodiesel producer).

Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-29

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