Wilmar - RHB Invest 2017-12-13: Limited Downside From Current Share Price

Wilmar - RHB Invest 2017-12-13: Limited Downside From Current Share Price WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar - Limited Downside From Current Share Price

  • Downside risks to CPO prices would be quite limited from hereon, as they have fallen below MYR2,450/tonne in December. However, we think there is a lack of catalysts for a significant recovery of Wilmar's share price as demand may be hampered by India’s higher import taxes and Indonesia’s lower biodiesel quota in 1H18. 
  • Meanwhile, although La Niña is expected to be mild, any major volatility in soybean prices could affect soybean crush margins. 
  • We raise our in-house CPO price assumptions but maintain NEUTRAL on the stock but with a slightly lowered TP of SGD3.31 (from SGD3.33, 6% upside).

Change in in-house CPO price assumption; limited downside from now.

  • Moving forward, we believe CPO prices are likely to remain relatively rangebound between MYR2,400 and MYR2,700 per tonne, therefore limiting downside risks. 
  • We lift our in-house price per tonne assumptions to MYR2,550 (from MYR2,400) for 2018 and to MYR2,700 (from MYR2,500) for 2019. CPO output in 2018 for both Malaysia and Indonesia should slow down, from the 12% and 21% YoY jump in 2017 respectively. 
  • Wilmar International (Wilmar) expects its production to rise between 5% YoY and 10% YoY in 2018.

Upside to Wilmar’s share price is capped by demand. 

  • Nonetheless, we think off-take to the additional palm products could be hampered by India’s higher import taxes on both crude and refined palm oil. In addition, Indonesia also lowered its biodiesel quota for Nov 2017 to Apr 2018 by 8% YoY. 
  • Wilmar’s allocation fell further ( > 20%) as industry capacity increased. The outlook for palm-based biodiesel export markets is also gloomy, with the high import duties imposed by the US and EU. As such, we think tropical oil margins for 1H18 could come off from 1H17 levels.

Emergence of La Niña and its impact. 

  • The probability of La Niña occurring at end-2017 is now at 75%. While climate models suggest that any event is likely to be weak and short-lived, we believe a mild La Niña could still have an impact on vegetable oil supply and the sentiment on prices. 
  • We think there is a downside risk here – despite ample global soybean supplies – as any major volatility in soybean prices could negatively impact Wilmar’s soybean crush margins.

Maintain NEUTRAL. 

  • We raise our FY18-19 numbers by 4% and 6% respectively to account for higher CPO price assumptions. We believe the key positive development for 2018 would be the group’s growing consumer pack segment while the China listing is expected to only come in 2019. 
  • However, our SOP-based TP dips to SGD3.31 (from SGD3.33) as we apply a lower target 12x (from 13x) FY18F P/E for the plantation segment, in line with the shrinkage of sector peer valuations, and update our latest in-house forex forecast.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-12-13
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.31 Down 3.330