Wilmar International - CIMB Research 2017-08-11: Looking Beyond The Weak 2Q Results

Wilmar International - CIMB Research 2017-08-11: Looking Beyond The Weak 2Q Results WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Looking Beyond The Weak 2Q Results

  • Wilmar International expects 2H results to be better than 1H.
  • This will be driven by higher sugar contribution, better palm processing margin, positive crush margins and higher sales volumes due to festivals in China.
  • We gathered that it is on track to list its China operations in 2019.
  • We project 2H core net profit of US$768m vs. 1H’s US$350m.
  • Maintain Add call with an SOP-based target price of S$4.52.

Key takeaways from 2Q17 results briefing 

  • The main takeaways from 2Q17 results briefing are:
    1. 2Q earnings were impacted by losses from sugar trading, lower palm processing margin and higher-priced inventories at consumer products division;
    2. expects stronger 2H performance;
    3. on track to list its China operations in 2019;
    4. plans to improve dividend payout to over 30% of net profit; 
    5. predicts stronger palm processing margins in 2H; and
    6. revealed that the Indonesian government has lowered the biodiesel pricing formula.

Reasons behind the weak 2Q results 

  • Wilmar revealed that the 94% qoq drop in 2Q17 core net profit to US$37m was due to weaker performance from tropical oils and losses from its sugar business. 
  • Tropical oils division was impacted by untimely purchase of raw materials and weaker processing margins. Sugar losses widened to US$107m in 2Q17, as its trading division reported losses for the first time since it ventured into sugar. 
  • On top of this, consumer products earnings were impacted by higher-priced inventories in 2Q17.

Stronger earnings in 2H17 

  • The group is optimistic of a better 2H17 performance from all its key divisions. The group explained that most of the negative factors that affected its results in 1H are unlikely to repeat in 2H. 
  • The better 2H results will be driven by seasonally higher sales volumes from its tropical oils, oilseeds and grains divisions. 
  • On top of this, the group has used up most of the high-priced inventory in the consumer pack division, and sugar division typically delivers stronger results in 2H17.

On track to list its China operations in 2019 

  • Wilmar also said that it is on track to list its China operations in Shanghai in 2019. The group is currently carrying out an internal restructuring of its China operations. 
  • We expect the group to fetch better valuations for its assets in China via a separate listing as we believe Chinese investors will be able to better appreciate the group’s strong distribution channel and consumer products brands in cooking oils, flour and rice in China.

Other interesting points from the briefing 

  • The group revealed that it is more optimistic on its business prospects today than a few years ago due to the strong growth outlook for all its key businesses. It is of the view that processing margin for palm oil should improve in 2H17 due to expectations of higher palm oil supply. 
  • However, it also revealed that Indonesia lowered the pricing formula from “CPO + US$125 per tonne” to “CPO + US$100 per tonne” in June 2017.

Maintain Add with unchanged target price of S$4.52 

  • We project 2H17 results to be stronger than 1H due to stronger performances from all the group’s key segments. We expect the group to report US$768m net profit in 2H17, which is higher than 1H17 net profit of US$350m but 21% lower than 2H16 net profit of US$974m. 
  • Maintain Add due to its attractive valuations (P/BV of 0.98x) and plans to list China assets. 
  • Key downside risks include untimely purchase of raw materials and listing of China businesses not materialising.

Ivy NG Lee Fang CFA CIMB Research | http://research.itradecimb.com/ 2017-08-11
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 4.520 Same 4.520