Wilmar International - DBS Research 2017-11-15: Await Steadier Close For The Year

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Await Steadier Close For The Year

• Wilmar International's 3Q17 results largely in- line with our full year forecasts.
• Oilseeds and Grains buffered performance in the quarter after Tropical Oils disappoint.
• On track for IPO plans in FY2019.
• Maintain HOLD, TP of S$3.50.

Oilseeds and Grains buffered performance. 

• Wilmar had been affected by weaker margins in Tropical Oils and one-off trading losses in Sugar through 9M17. Going forward, we expect Wilmar to see a stronger close for the year, on improving contributions from its Oilseeds and Grains segment due to positive crush margins and volumes, as evidenced in 3Q17.
• Wilmar is gradually extending penetration of its well-established brands via its vast distribution networks in Asia’s growing markets, which will provide another long-term earnings upside potential. 
• Our FY17/18 earnings revisions of -11%/-7% to US$1bn/US$1.1bn reflected the latest development above.

Where we differ: 

• We do not anticipate any catalysts that would move the stock significantly higher in the near term. We believe the potential earnings recovery in the next few quarters have 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).

Beyond earnings performance: Catalyst from China operations' listings. 

• Possible IPO plans (A-share listing) for its China operations may drive its share price closer to its potential listing date. Wilmar is expected to file for IPO earliest in 1H19. We note that in 9M17, the group’s China pretax contribution amounted to c.50%.

Valuation

• We employed DCF methodology (FY18F base year) to arrive at our revised TP of S$3.50 (WACC 7%, TG 3%). 
• Our TP offers 9% upside from last close price of S$3.19 and 2.1% dividend yield for FY17F.

Key Risks to Our View

• CPO and soybean prices. Wilmar’s share price is influenced by palm oil refining/soybean crushing margins on top of crude palm oil (CPO)/sugar price expectations.

WHAT’S NEW

3Q17 results largely in line with our expectations. 

• Wilmar's core NPAT reached US$323.7m (-16% y-o-y, +867% q-o-q), rebounded strongly q-o-q on track to our forecast and management guidance on stronger performance outlook in 2H17 despite the relatively weak performance in 2Q17, lower than consensus and in line with our expectations. 
• The positive improvement in 3Q17 was supported by the improving performance of its Oilseeds and Grains division, which was successfully offset by the relatively weak result of tropical oils and sugar businesses. 
• Consolidated revenue reached US$11.2bn (flat y-o-y, +5% q-o-q), which is also on track to meet our/consensus forecasts. All divisions' revenue performance met our forecast, and the best performer was Oil seeds and Grains at S$5.5bn (+17% y-o-y, +27% q-o-q), followed by the Tropical Oils and Sugars at S$4.3bn (-2% y-oy, -3% q-o-q) and S$1bn (-41% y-o-y, -35% q-o-q) respectively.

Tropical Oils hit by downstream business 

• Profit before tax from Tropical Oils segment was weak at US$83.1m (-51% y-o-y, +140% q-o-q) mainly on the back of lower processing margins, despite seeing higher production yield and volumes for plantation.  Lower biodiesel quota awarded in Indonesia also affected sales volume in 3Q17. 
• We are expecting full-year profit before tax to be US$467m on improving processing margins in 4Q17.

Strong performance from Oilseeds and Grains 

• Profit before tax from Oil seeds and Grains performed strongly at US$254.7m (+3% y-o-y, +323% q-o-q) on higher crush volume and good crush margins, reflected by the segments’ revenue performance and profit before tax margin of 4.6% (3Q16/2Q17 PBT margin 5.2%/1.4%). According to management, crushing utilisation remains high at > 80% into 4Q17. 
• We note that the slight decline in Consumer Products’ volumes relates to its consumer packs’ business, offset by better volumes in its bulk packs’ business.

Sugar returns to profitability 

• Profit before tax from Sugar segment recovered from losses in 2Q17 arising from its first-ever trading losses due to untimely purchases of sugar, to US$75.2m (-13% y-o-y). Decline from 3Q16 was largely attributed to timing effect of Australia’s new sugar marketing programme. According to Wilmar, subsequent quarters would see sales of certain proportion of sugar produced. 
• Going forward, write-downs for the Sugar business may have to be effected in view of lower-thanexpected margins.

Associates and Others segment 

• “Others” segment saw better profit before tax of US$56.4m (+61% y-o-y, +96% q-o-q) as the group saw higher dividend income and gains from its investment portfolio and shipping and fertiliser business.

Stable gearing ratio 

• Ending cash & cash were lower at US$3.4bn (-8.6% ytd), while gross debts expanded to US$18.6bn (+9.4% ytd, +6.9% q-oq).
• This translates into reported net gearing ratio of 0.72x (0.30x including liquid working capital); 3Q17 capex (excluding associates) was higher at US$228m (3Q16: US$180m).

Outlook and recommendation 

Positive on Oilseeds and Grains segment. 

• Management is expecting good performance in 4Q17 in Oilseeds and Grains segment on the back of positive crush margins and volumes.
• We expect the core NPAT to reach US$328.6m (-27 y-o-y, +1% q-o-q) in 4Q17. We believe the good performance in Oilseeds and Grains segment to continue in 4Q17. We also expect a slight improvement in its Tropical Oils division, mainly on the better processing margin in 4Q17.

China IPO plans on track. 

• Wilmar is in the midst of restructuring its China entities in preparation for listing. The restructuring is on track for completion by end of the year. Thereafter, Wilmar would need to prepare one full-year of financials (FY18) before filing for IPO application in FY19.
• Wilmar is expected to file for IPO earliest in 1H19. With a listing cap of 23x PE, there is potential to unlock value in Wilmar and newsflow 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 have yet to input this into our valuations.

Maintain HOLD, TP of S$3.50 

• Our FY17/18 earnings revisions of -11%/-7% to US$1bn/US$1.1bn key in the lower-than-expected Tropical Oils' PBT, but offset by the strong performance of Oilseeds and Grains segment. Our new earnings forecasts are slightly below consensus’ as we are more cautious on Wilmar's overall profitability outlook next year.
• New earnings forecast resulted a new discounted cash flow (DCF) target price of S$3.50 (previously S$3.52). Our DCF TP implies FY18F PE of 15.0x, which is around its five-year average PE multiple of 14.7x. 
• We do not see the potential of any meaningful re-rating catalysts in the next 12 month unless Wilmar can show a meaningful profitability improvement in its Tropical Oils division.

William Simadiputra DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-11-15

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.50 Down 3.520