Wilmar International (WIL SP) - UOB Kay Hian 2017-11-15: Buy On Weakness; Better Outlook

Wilmar International (WIL SP) - UOB Kay Hian 2017-11-15: Buy On Weakness; Better Outlook WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - Buy On Weakness; Better Outlook

  • Wilmar’s share price fell 3.9% after the announcement of its 3Q17 results, in line with our expectation. This weakness is not justified and the unlocking of its China business through an A-share listing by 2H19 will be a share price catalyst. 
  • The tropical oils and oilseed and grains divisions should see better performances in 4Q17, while the sugar segment’s performance remains weak. We expect 4Q17 net profit to be better qoq, on track to meet our expectation. 
  • Maintain BUY. Target price: S$4.10.


Share price weakness not justifiable. 

  • Wilmar International’s (Wilmar) share price was down 3.9% after its 3Q17 results were announced, in line with our expectation. This weakness is not justified and the unlocking of its China business through an A-share listing by 2H19 will be a share price catalyst. 
  • Despite the weaker sugar and palm refining operations in 3Q17, Wilmar’s performance was still better than its peers’.

Key concerns of investors post 3Q17 results 

Why was the tropical oil division’s performance still weak despite better CPO prices? 

  • Wilmar has large downstream processing exposure and thus the positive impact of higher CPO prices on Wilmar was not as large as that on upstream players. The lower forward pricing levels (vs spot pricing) in 2Q17 and early-3Q17 did not prove to be much of a help with downstream processors trying to fix pricing levels for their products. 
  • The forward pricing curve has flattened and this improved palm refining margins in 3Q17 and should lead to a better margin performance 4Q17.

Why did 3Q17 record low sugar sales volumes? 

  • The lower yoy sales volumes for milling came on the back of a change in timing of sales; sugar sales for 2017 could spill over into 1Q18 (vs previous years when sugar sales for milling is completed within 3Q and 4Q). 
  • Merchandising and processing did not do well due to the unexpected release of sugar reserves by the Indian government. 2017’s sugar performance will be weak but should be better in 2018.

Why did consumer pack sales volumes decline despite management’s optimistic outlook for the business? 

  • The lower consumer pack sales volume was due to lower cooking oil sales in China as more people are eating out vs cooking at home (less consumer pack demand). This translated into higher bulk sales (sales to restaurants, industrial use etc) which is classified under manufacturing (sales volume up 12% yoy for 9M17). 
  • Management mentioned that its cooking oil business is mature in China and growth will be driven by rice and flour consumer pack sales.


Key highlights from briefing: 

Oilseeds and grains should continue to be the star performer in 4Q17. 

  • Soybean crushing is still seeing positive margins and Wilmar has sufficient soybean to cater to soymeal demand in China. Wilmar’s operations were not affected by the recent news on more stringent checks on the quality of imported soybean that led to a shortage in soybean supply and temporary shutdown of crushers. 
  • Utilisation rate for soybean crushing is relatively high at 80-90% vs the industry’s 55-60%. Industry utilisation has improved from 40% a few years ago thanks to the shutdown of smaller standalone crushers which were not as efficient as the larger and integrated crushers.
  • Going forward, consumer pack sales volume would largely be driven by rice and flour sales. In China, Wilmar is now the second-largest player in both segments. Wilmar is also penetrating the consumer pack market (for rice and flour) in Indonesia and adding flour milling capacity in the country. 
  • Emerging markets are key target markets for Wilmar and its focus has always been consumer staples where Wilmar has a supply chain advantage.

Tropical oil performance improving gradually. 

  • CPO production has not fully recovered yet and ytd, yields have been below our expectations. 2018 should see a strong recovery in production, especially 2H18. This is in line with our expectation. 
  • Refining margins in Malaysia and Indonesia have been improving from the last two quarters (1Q-2Q17) during which dismal performances were seen. But the improvements are likely to be only marginally better in 4Q17 as the supply of raw materials is still relatively tight (vs huge downstream capacities). 
  • Downstream margins have been marginally affected after the revision to Indonesia’s biodiesel pricing formula to CPO + US$100/tonne from CPO + US$125/tonne effective 1 May 17.

2017 not a good year for sugar; looking better in 2018. 

  • The sugar division’s performance is likely to remain lacklustre in 4Q17. Seasonality for its milling operations has changed with better control on sugar sales from Australia. 
  • Previously, sales was concentrated in 3Q and somewhat in 4Q.


  • No change to our earnings forecasts. We maintain our EPS forecasts of 16.5 US cents, 19.8 US cents and 22.7 US cents for 2017-19 respectively.


  • Maintain BUY and SOTP-based target price of S$4.10. 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 have pegged:
    1. the oilseeds and grains division to 20x 2018F PE to factor in the potential listing, and assumed this division is focused on China operations;
    2. the tropical oils division at 15x 2018F PE; and
    3. the sugar division and other businesses at 10x 2018F PE.
  • We are positive on Wilmar’s outlook on the back of the expected strong performance from the oilseeds and grains division. Management is continuing with its expansion plans, especially for oil seeds and grains operations in China. Demand for consumer products is expected to increase, supported by a bright economic outlook in key Asian countries.
  • Meanwhile, the listing of Wilmar’s China operations is on track and the exercise is expected to unlock value for the group.


Potential listing of China operations. 

  • Progress is on track. By end-17, all of Wilmar’s businesses in China will be restructured under one onshore company in China. After the completion of one full financial year, Wilmar is expected to submit the listing application by early-19. 
  • As more details of its China operations are made available in the listing process, investors might see greater value in Wilmar. For the initial offer, management is looking to float only 10% of its shares and will slowly increase the float at a better valuation.

Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.100 Same 4.100