Wilmar International - DBS Research 2018-02-23: Trading At Bargain Price After Prolonged Correction

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WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International - Trading At Bargain Price After Prolonged Correction

• Upgrade to BUY with revised Target Price of S$3.65 (previous: S$3.50).
• Higher earnings expected on better margin outlook.
• Stock is a bargain after prolonged correction.
• China operations listing could be next re-rating catalyst.

Upgrade to BUY rating with higher Target Price of S$3.65. 

• Wilmar’s share price corrected c.25% in 2017 and we believe that it is currently a bargain, trading at 12.1x FY18F P/E (-1SD forward P/E), lower than its five-year average multiple of 14.6x. 
• Our higher target price is derived from our revised FY18F/19F earnings forecast (by 10%/16%), on better margins outlook in its Oil Seeds and Grains segment supported by soy crushing margins in China. 
• Improving cost management will also help keep Tropical Oils’ profitability in check. Our Target Price offers c.20% upside from the last close of S$3.06 and c.3% dividend yield for FY18/F.

Where We Differ: Market priced in mild earnings performance in previous two years. 

• At the current price, we believe that the market has fully priced in concerns over earnings fluctuation in its Tropical Oils as well as Oil Seeds and Grains segments, due to commodity prices and supply chain congestion. However, we are of the view that the market is underestimating the ROE improvement potential on a stronger margin outlook. 
• In the longer term, with a greater presence in India (through AdaniWilmar’s proposed JV with Ruchi), and gradual penetration of well-established brands – including Goodman Fielder – in China.

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 an IPO in 1H19, at the earliest. 
• We note that the China operations contribute to c.60% of Wilmar’s pretax profits.

Valuation

• We employed DCF methodology (FY18F base year) to arrive at our revised Target Price of S$3.65 (WACC 7%, TG 3%).

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) and sugar price expectations.

WHAT’S NEW - 4Q17 results largely in line 

Upgrade to BUY; Target Price of S$3.65 – Share price corrected c.25% in 2017 and we believe it is a bargain.

• We have upgraded Wilmar to BUY rating, with a higher Target Price of S$3.65. Our higher target price is derived from our latest revised forecast for FY18/19 earnings (by 10%/16%) on better margins, mainly in its Oil Seeds and Grains segment. Improving cost management also will keep Tropical Oils’ profitability in check.
• Margin improvement on better cost management across the divisions will improve Wilmar’s ROE performance and may be one of the share price re-rating catalysts. We have traced that the margin surprises seen in 2Q16 and 2Q17 were the key trigger of valuation de-rating on concerns that Wilmar’s earnings have become less predictable due to dynamic commodity prices.
• We believe Wilmar will be able to continue improving cost management across all divisions, particularly the upstream Tropical Oils segment, which should result in better margins. Positive and stable soybean crushing margins will also help support Wilmar’s oilseeds & grains division’s profitability.

What is priced in? Market has priced in earnings volatility from commodity prices and its trading-related division.

• Wilmar is trading at 12.1x FY18F P/E, lower than its five-year average multiple of 14.6x and we believe it is a bargain.
• At the current share price, we believe that the market has priced in concerns about earnings fluctuation in its trading-related division and swings in commodity prices. We believe Wilmar’s profitability will improve this year, driven by steady margins in oilseeds and grains as well as improving margins in its palm-oil division, which will also improve Wilmar’s ROE.

Beyond earnings performance: Catalyst from China operations’ listing.

• 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 an IPO for its Chinese operations in 1H19, at the earliest. We note that in 2017, the China region’s pretax contribution amounted to > 60%. China A-share’s listing permit (multiple of 23.0x) is much higher than Wilmar’s current P/E of 12.1x.

4Q17 results overview 

Core earnings met our and consensus expectation. 

• Core NPAT reached U$374m in 4Q17 (-16% y-o-y, +15% q-o-q), sending FY17 core NPAT to U$1bn (+7.3% y-o-y), in line with our and consensus forecast. 
• The improving earnings trend in 4Q17 was driven by the quarter-on-quarter (q-o-q) recovery in the profitability of the tropical oil seeds division, which rebounded from a low base in 3Q17, despite the weaker q-o-q earnings in the oilseeds and grains divisions, due to flat q-o-q sales volume and lower soybean crushing margins in 4Q17.

Tropical oil division rebounded q-o-q, despite weaker CPO output. 

• Tropical oils’ profit before tax reached U$104.9m (- 43% y-o-y, +26% q-o-q). The q-o-q improvement was driven by improving downstream processing margins, despite the lower CPO output of 453k MT (-17% y-o-y, -7% q-o-q) – which implies fruits yield of 4.7MT per hectare – caused by poor weather conditions.

However, oil seeds and grains 4Q17 PBT weaker q-o-q. 

• The division’s pre-tax earnings reached U$206.5m (+16% y-o-y, - 19% q-o-q) in 4Q17. The weaker q-o-q result was driven by the lower soybean crush margin in the period and flat sales volume growth. The combined sales volume in manufacturing and consumer products reached 9.2m MT (+23% y-o-y, flat q-o-q), mainly affected by the Chinese New Year season, which happened in early 2017.

Weak performance in its sugar division. 

• Sugar’s pre-tax profit reached U$41.4m (-69% y-o-y, -41% q-o-q) in 4Q17. The decline due to the marketing programme for the Australian sugar business, i.e. only a part of the sugar produced will only be sold in 1H18.

Associates and JVs poised to perform better going forward.

• Associates and JVs contributed pre-tax profit of US$112m in 4Q17, bringing full year contribution to US$228.3m (+62% yo-y). Accordingly, entities in Russia, Ukraine, China, India and Africa saw better performance and we expect growth in contribution going forward.

2017 total dividend of S$0.10 per share. 

• The board has proposed a final tax-exempt (one-tier) dividend of S$0.07 per share – total dividend reached S$0.10 in 2017, with total dividend payout ratio of c.39%.

William Simadiputra DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-02-23

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.65 Up 3.500