Wilmar International (WIL SP) - UOB Kay Hian 2017-06-14: Good Opportunity To Accumulate

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Good Opportunity To Accumulate

The recent weakening in share price is a good opportunity for investors to accumulate Wilmar International (WIL). The drop could be due to the weakening of commodities prices and concerns over the negative soybean crushing margins in China.
We remain positive on its stable long-term growth, underpinned by its key businesses and the potential value creation from the listing of its China operations.

Meanwhile, 2Q is seasonally the weakest quarter. Maintain BUY. Target price: S$4.40.

Wilmar International’s (WIL) share price retreated 9.4% from a high of S$3.82 on 15 May 17 to a low of S$3.46 on 9 Jun 17. The drop is possibly due to poor market sentiment as:
1. there is a weakening in commodities prices, and
2. concerns over the impact on earnings from the negative soybean crushing margins in China.
Among the major commodities that WIL deal with, prices of sugar dropped the most (-8.6%), followed by CPO spot (-5.3%) and soybean (-2.2%) from 15 May 17 to 9 Jun 17.
Furthermore, soybean crushing margins turned negative in 2Q17 due to large soybean crushing volumes, which were driven by massive soybean imports by China in the last few months.

Based on historical trends, we note that Wilmar’s earnings ratio for 1H and 2H is circa 40%:60%. 1Q17 results accounted for only 23% of full-year estimates, and we are expecting 2Q17 performance to be unexciting, due to:
1. weaker contribution from oilseeds & grains division due seasonally lower sales volume, and
2. weaker contribution from sugar division as sugar milling activity in Australia should only start contributing from 2H17 onwards.
This will be partly offset by better contribution from tropical oils division on the back of gradual production recovery in 2Q17. This would lead to higher refining volume and sales volume.

We are positive on the potential listing of its China operations as it could help to unlock group value and also result in stable long-term growth of its key businesses. We are expecting net profit growth of 36% yoy for 2017, supported by steady contributions from all three divisions on the back of higher sales volume and steady prices.
Although WIL’s share price has weakened recently, we view this as a good opportunity for investors to accumulate WIL’s share.
We re-iterate our BUY call on WIL and SOTP-based target price of S$4.40, representing total return of 29% (share price upside of 25.4% dividend yield of 3.9%).

Tropical oils: Could potentially see a better qoq performance on the back of higher sales volume. WIL is the largest palm oil refiner and is expected to see its utilisation rate increase in tandem with the pick-up in palm oil production in Malaysia and Indonesia. For its upstream operation, management indicated that production is expected to recover in 2017, but at best back to 2015’s level, implying FFB production growth of 5-15% yoy. 2Q17 production is expected to be higher qoq and yoy.
Oilseeds & grains: Soybean crushing margins are expected to be capped by massive soybean imports into China in the coming months. 2Q17 crushing margin could potentially be lower qoq and yoy, but is expected to remain marginally positive for WIL, thanks to its timely purchase of raw materials. Average soybean crushing margin for the industry was negative Rmb199/tonne for the period 1 Apr 17-9 Jun 17. Moreover, the consumer products segment sales volume is expected to remain lacklustre in 2Q17 due to the absence of festive demand.
Sugar: 1H is generally a low season for sugar division. Sugar harvesting usually starts in late-May. Thus, 2Q17 earnings contributions for sugar division will mainly rely on sales from the merchandising & processing segment. Meanwhile, Cyclone Debbie is not expected to affect Wilmar’s sugar production significantly. The low sugar prices will affect contribution from sugar milling and processing, but this will be compensated by higher sales volume.

Capex for 2017 is expected to be higher than that of 2015 and 2016. We forecast capex of US$1b for 2017 vs US$722m in 2016, which is similar to management’s guidance of US$900m-1b.
Management indicated there are vast untapped opportunities in China, India and Vietnam. Thus, management intends to further expand its businesses in rice, flour and related consumer products in these countries. About 60% of the capex will be utilised for its expansion plan in China.
Currently, Wilmar’s rice and flour-related businesses in China are running at full capacity.

No change to our earnings forecasts. We maintain our EPS forecasts of 20.6 US cents, 21.6 US cents and 22.7 US cents for 2017-19 respectively.

Maintain BUY and SOTP-based target price of S$4.40. This translates into 14.0x blended 2018F PE, which is slightly higher than its 5-year mean (1-year forward PE of 13.2x).
We value the oilseeds & grain division at 20x 2018F PE to factor in the potential listing of its China operations, the tropical oils division at 15x 2018F PE, and the sugar division and other businesses at 10x 2018F PE respectively.

Potential listing of China operations. As more details of its China operations are made available for the listing process, investors might see greater value in Wilmar.
Stronger-than-expected earnings growth.

Singapore Research Team UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-14

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.400 Same 4.400