Wilmar International (WIL SP) - DBS Research 2017-08-15: Tropical Oils Division To Drive Stronger Performance In 2H17

WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Tropical Oils Division To Drive Stronger Performance In 2H17

Earnings were below our/consensus estimates.
Lower margins Tropical Oils, losses at Sugar.
Tropical Oils division to improve WIL’s 2H17 performance.
3 Scts interim dividend declared (+20% y-o-y), maintain HOLD and TP of S$3.52.

Core net profit after tax (NPAT) reached US$37m (turned positive y-o-y, -88% q-o-q), below our/consensus expectations. Despite the sound revenue performance, the lower-than-expected profitability was due to poorer achievements across the various business segments.
Tropical Oils and Oilseeds divisions' pretax profit reached US$59.5m (-68% y-o-y, -67% q-o-q) and US$60.1m (net losses of US$343.8m in 2Q16, -72% q-o-q) respectively while Sugar division incurred pretax losses of US$106.8m in 2Q17.

Wilmar's 2Q17 revenue reached US$10.6 bn (+13% y-o-y, flat% q-o-q) in line with our/ consensus estimates.
Tropical Oils and Oilseeds & Grains revenue reached US$4.47bn (+7% y-o-y, -4% q-o-q) and US$4.3bn (+7% y-o-y, -4% q-o-q) mainly on higher sales volume, both were also the key revenue growth driver in 2Q17. Tropical Oils division's revenue performance was supported by the palm oil estates' yield recovery.
CPO output volume reached 409,000 MT (+15% y-o-y, +4% q-o-q). CPO yield improved to 5.2 MT per hectare in 2Q17, thanks to the easing of El Nino impact y-o-y, although there were no changes in Wilmar’s overall planted area during the period.
Meanwhile, the Oilseeds & Grains division's revenue performance was driven by higher crush volume.
Overall sales volume reached 7.8m MT (+12% y-o-y, +10% q-o-q).
Sugar revenue reached US$1.6bn (+54% y-o-y, +29% q-o-q), a significant pick-up, thanks to higher merchandising activities in 2Q17. Sugar sales volume reached 3.14m MT (+26% y-o-y, +25% q-o-q), mainly driven by the contribution from PT Sugar Duta International.

Associates’ contribution came in at US$24.5m (-29% y-o-y, - 8% q-o-q) while gain of US$24.1m in Others segment from US$1.2m in 2Q16 was mainly due to gains from investment securities on the back of improved equity markets.
Lower margins in Tropical Oils; losses in Sugar Tropical Oils’ 2Q17 pretax margin/MT came in at US$10 (- 68% y-o-y, -67% q-o-q). This was largely due to lower availability of palm oil which affected refinery margins.
Oilseeds & Grains’ pretax margin/MT for the quarter came in at US$8, an improvement from the one-off losses in 2Q16 on higher crush volume and positive crush margins but was down 74% q-o-q largely due to lower crush margins compared to 1Q17 and consumer segment’s performance being dragged down by expensive stocks.
Sugar’s pretax margin/MT for the quarter was -US$34 as the segment saw its first-ever trading losses due to untimely purchases of sugar.

Ending cash & cash equivalents were slightly lower at US$3.7bn (-5.8% ytd), while gross debts expanded 2.5% ytd (+0.1% q-o-q) to US$17.4bn, this translates into reported net gearing ratio of 0.79x (0.31x including liquid working capital).
2Q17 capex (excluding associates) remained stable at US$208m from US$226m in 2Q16.

We are maintaining our earnings estimate at this point despite the weak 2Q17 performance as we are expecting overall performance improvement in 2H17, mainly in the Tropical Oils division, on better CPO production yield outlook and improvement in downstream profitability.
We also expect the stable crushing margin outlook and seasonal peak for the consumer segment to support the Oilseeds & Grains division's earnings performance ahead. While sugar prices have been volatile, management expects sugar segment to be profitable as a whole for the year.

The group is on track to restructure its China subsidiaries with the aim of eventually establishing a China holding company for this purpose and prospectus for the proposed separate listing should be ready in FY19 at the earliest.

Wilmar raised its interim dividend by 20%, declaring a 3-Sct interim dividend for 2Q17, compared to a 2.5-Sct interim dividend in 2Q16.
We expect full-year dividends to be ~8.4 Scts (final dividend of ~5.4 Scts), assuming a higher dividend payout ratio of 35%. At last close price of S$3.42, this represents a dividend yield of ~2.5%.

We do not anticipate any catalysts that would move the stock significantly higher in the near term. We believe the sequential earnings recovery in the past three quarters has already been priced in.
In the longer term, with a greater presence in India (through Adani-Wilmar’s proposed JV with Ruchi), and gradual penetration of well-established brands – including Goodman Fielder – in China, Wilmar’s FY16-19F earnings are expected to expand at a c.8% CAGR (low-base effect).
Possible IPO plans (A-share listing) for its China operations, which will take at least ~18 months, may drive its share price closer to its potential listing date. We note that the group’s China pretax contribution is typically ~45-50%.

We employed DCF methodology (FY18F base year) to arrive at our TP of S$3.52 (WACC 7%, TG 3%). Our TP offers 3% upside from last close price of S$3.42 and 2.5% dividend yield for FY17F.

William SIMADIPUTRA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-08-15

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.52 Down 3.900