Wilmar International (WIL SP) - DBS Research 2017-05-15: Strong Performance From Production Recovery

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Strong Performance From Production Recovery

1Q17 core earnings of US$313m (41% y-o-y; -30% q-o-q) – above our expectations
Strong contribution from all segments; partly offset by seasonal losses in sugar segment
FY17F/18F earnings unchanged HOLD rating and S$3.90 TP maintained.

Excluding changes in fair value of biological assets, mark-to-market loss from investment securities, core 1Q17 earnings came in at US$313m (41% y-o-y; -30% q-o-q) – above our expectations on annualised basis.
Reported 1Q17 earnings came in at US$362m (51% y-o-y -30% qo-q).
Both Tropical Oils’ and Oilseeds & Grains’ pretax were 20% and 27% higher than the previous year's, although this was partly offset by US$35m losses in Sugar.

Oilseeds & Grains delivered pretax of US$214m (+27% yo-y; +20% q-o-q) – backed by higher crush margins for the quarter; partly offset by lower consumer products volume.
Tropical Oils booked 1Q17 pretax of US$179m (+20% y-o-y, -3% q-o-q) – driven by sequential volume expansion.
The group’s Sugar segment booked out-of-season pretax loss of US$35m (from US$18m loss in 1Q16), dragged by seasonal maintenance. The group nevertheless booked 60% y-o-y increase in sugar revenue; driven primarily by 22% higher merchandising & processing volume and 32% y-o-y jump in ASP to US$522/MT.

Together with improved operating results, Wilmar also booked a 229% y-o-y jump in share of results from associates, mainly on account of stronger contributions from its China associates and absence of losses from its India associate.
For the quarter, the group also recognised US$70m pre-tax in Others segment on the back of higher shipping and fertiliser contribution, combined with gains from investment securities.

Tropical Oils' 1Q17 pretax margin/MT came in at US$32 (+18% y-o-y; +5% q-o-q). This was on the back of improved contribution from Plantations (thanks to higher prices) and consistent downstream performance (including biodiesel profits).
Oilseeds & Grains' pretax margin/MT for the quarter came in at a strong US$30 (+28% y-o-y; +26% q-o-q).

Ending cash & cash equivalents remained sequentially stable at US$4.1bn (+10% y-o-y), while gross debts expanded 14% y-o-y (2% q-o-q) to US$17.4bn, this translates to reported net gearing ratio of 83.5% (39.8% including liquid working capital).
1Q17 capex (excluding associates) remained stable at US$175m from US$165m in 1Q16.

The group is exploring a separate listing of its China operations (A-share listing) through issuance of new shares with minimum free float of 10%. We understand the group is currently restructuring its China subsidiaries with the aim of eventually establishing a China holding company for this purpose. A prospectus for the proposed separate listing would not be available until 18 months from now; and the group has appointed a Chinese bank to undertake the planned corporate action.
Wilmar had attempted to list its China operations in China in 2009; but decided to abandon the plan on valuation grounds. The group is optimistic it would be valued higher than its current multiple on a consolidated basis.
China businesses are the fastest growing within the group now that it has established its rice and flour businesses, which still have significant upside potential given the huge market size of 120m MT and 80m MT p.a. respectively. In 1Q17, the group’s China pretax contribution amounted to c.50% - thanks to good soybean crush margins.

Demand for soybean meal in China remains strong; driven primarily by growth in industrialised farms (replacing smaller farms being closed down on environmental impact crackdowns) and due to less import of DDGS (distiller’s dried grains with solubles).
The group did not suffer any significant damage from Cyclone Debbie, as Wilmar’s assets are located further north of the affected areas.

We expect the group’s earnings to moderate sequentially in 2Q17 on the back of:
1. Lower quarter-to-date CPO prices
2. Moderating soybean crush margins
3. Flattish outlook for tropical oils' margins.
Our DCF-derived TP of S$3.90 and HOLD rating are maintained.

Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-05-15

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.900 Same 3.900