Wilmar International (WIL SP) - UOB Kay Hian 2017-05-05: 1Q17 Results Preview ~ Expect Results To Be Weaker qoq But Stronger yoy

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - 1Q17 Results Preview ~ Expect Results To Be Weaker qoq But Stronger yoy

1H is usually weaker than 2H for Wilmar as sugar contributions come only in 2H. We are expecting a weaker 1Q17 performance qoq due to:
1. weaker demand for consumer products,
2. lower contribution from tropical oil on seasonality (but higher yoy), and
3. less contribution from the sugar division.

However, this will be partly mitigated by stable soybean crushing margins. Thus, we estimate core net profit at US$230m-270m for 1Q17.
Maintain HOLD. Target price: S$3.50. Entry price: S$3.20.

1Q17 results preview: Expect core net profit of US$230m-270m, which is higher than 1Q16’s reported core net profit of US$222m, but lower than 4Q16’s US$590m.
Wilmar is targeting to release its 1Q17 results on 11 May 17 after the market close.

Historically, Wilmar’s earnings mix in 1H and 2H of the year usually comes in at 40%:60%.
In 2017, we are expecting weaker 1Q17 results qoq due to:

Weaker demand for consumer products. Demand for consumer products is expected to be weaker post Chinese New Year. Demand for CNY was front loaded to Dec 16 as CNY took place in January this year vs February in 2016. Consumer products sales volume increased 17.9% yoy in 4Q16. Thus, 1Q17 sales volume for consumer products is expected to be lower qoq and yoy.
Weaker tropical oil performance qoq. We are expecting weaker FFB production qoq in 1Q17 due to seasonality, but this should be partly mitigated by marginally higher CPO prices. However, yoy performance should be much better on the back of higher FFB production yoy and higher CPO prices. The yoy increase in FFB production was due to yield recovering from the drought.
Weaker contribution from sugar division. 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 stable sales volume for merchandising & processing segment.

Management indicated that soybean crushing margin is expected to remain good in 2017 and remain stable in 1Q17. This would partly mitigate the weak performance from other divisions. This division should see a stronger improvement in 2H16 on higher festive demand.

Palm refining margin is expected to be weaker qoq mainly due to more intense competition to secure feedstock during a seasonally low production period. However, refining margin is likely to be better yoy as more feedstock was available in the market in 1Q17 compared with 1Q16.

Indonesia’s fourth biodiesel contract announcement for the period Apr-Oct 17 has been delayed and this could due to the potential adjustment of the biodiesel pricing formula from US$125/tonne to US$100/tonne.
According to Berita Satu, biodiesel volume for the fourth biodiesel contract could be lower at 1.4m KL compared with the third biodiesel contract’s 1.52m KL for the period Nov 16-Apr 17. For the past three contracts, the awarded volume to Wilmar was 38-49% of total contracted volume.
The change in subsidised pricing and lower volume awarded could negatively affect Wilmar’s profit margin. However, we understand that it will still be profitable. The biodiesel volume awarded in the previous three contracts account for only about 2-4% of Wilmar’s total manufacturing capacity.

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. FFB 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.

We understand that Cyclone Debbie is likely to affect Wilmar’s sugar production this year. However, not all the areas are affected.
All in all, sugar production in 2017 will not be significantly affected. Moreover, the harvesting activity is expected to begin in Jun 17 as usual.

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.

Maintain 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).
Entry price is S$3.20.

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/ 2017-05-05

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 3.500 Same 3.500