Wilmar International (WIL SP) - UOB Kay Hian 2018-02-26: A Better 2018 On Steady Growth

Wilmar International (WIL SP) - UOB Kay Hian 2018-02-26: A Better 2018 On Steady Growth WILMAR INTERNATIONAL LIMITED F34.SI

Wilmar International (WIL SP) - A Better 2018 On Steady Growth

  • 2018 should be another steady year with continuing growth from Oilseeds & Grains as well as recovery in the other two segments. We make no changes to our earnings estimates as key guidance is in line with our expectations. 
  • The capacity expansion in China will be the key earnings driver moving forwards. Its China listing plan is on track. Once more details of its China operations are made available in the listing process, investors might see greater value in Wilmar. 
  • Re-iterate BUY. Target price: S$4.10.



WHAT’S NEW


2018 earnings to continue to grow. 

  • Wilmar's share price has rebounded from the low of S$2.98 on 14 Feb 18 to S$3.13 as of last Friday on the back of good 2017 results. Post briefing, we remain positive on Wilmar International’s (Wilmar) outlook. We re-iterate our BUY recommendation and target price of S$4.10. 
  • 2018 is expected to be another good year for Wilmar with net profit expected to grow 21% y-o-y on the back of higher contribution from all three divisions and JVs and other associates. Key guidance during the analyst briefing are in line with our expectations.


Key highlights by segment: 

  1. Tropical oils (27% of 2017 PBT). 2018 earnings growth is expected to be supported by a recovery in FFB production due to improved FFB yield and stable demand from downstream operation. Refining margin is expected to improve in 2018 due to more FFB crop available in the market, as FFB production is expected to pick up significantly in 2H18. Moreover, Indonesia’s biodiesel consumption is expected to increase in 2018 from 2.8m-2.9m kl in 2017 to 3.2m-3.3m kl. Wilmar could be awarded a bigger allocation in the contract to be announced in Apr 18.
  2. Oilseeds & grains (46% of 2017 PBT). Soybean crushing margin is expected to remain good in 2018 on the back of strong soymeal demand in China. Consumer products’ volume growth will be better in 2018, supported by Chinese New Year demand in Jan and Feb 18 (vs in 4Q16 for 2017’s CNY). Wilmar is expanding its soybean, rice and flour processing capacity in China, and this will be Wilmar’s key earnings driver going forwards.
  3. Sugar (first loss in 2017). This segment is expected to register better sugar milling sales volume in 2018. Under the new sugar marketing programme in Australia, a proportion of the sugar produced would only be sold in 1H18. As such, we should see a smaller loss in 1H18 vs the past trend. Meanwhile, the downside risk for sugar prices is limited and current sugar prices of 13-15 US cents/lb is expected to give rise to good margins for its sugar division.
  4. JV and associates (14% of 2018 PBT). JV and associates registered an impressive improvement in 2017 and the trend is expected to continue in 2018, especially for its associates in China and Africa, which has operations largely in oilseeds & grains and sugar.


STOCK IMPACT


FFB production to improve y-o-y in 2018. 

  • For 2017, FFB production grew 2.7% y-o-y, which is lower than 2015’s level and weaker than global palm oil growth of 13% y-o-y. Management indicated that production is expected to continue recover in 2018.
  • Management is expecting FFB production growth of 10-12% y-o-y in 2018. Production in 1Q18 is expected to be lower q-o-q due to seasonality, and is expected to pick up slowly from Apr 18 onwards, in line with the industry trend. 
  • As of Dec 17, Wilmar had 19% of planted areas aged above 18 years. Management is targeting to replant 6,000ha in Malaysia and 6,000ha in Indonesia in 2018.

Higher industry CPO production to improve downstream utilisation and profitability. 

  • Global CPO production is expected to increase by 5.2% to 70m tonne. As the world’s largest palm oil refiner, we expect Wilmar to process larger volume that will help maintain its high utilisation rate. 
  • For 1Q18, Indonesia-based refiners are expected to see better refining margin as compared with Malaysia peers. 
  • Malaysia-based refiners are facing difficulties in sourcing for CPO after the Malaysian government suspended the CPO export duty for three months (might need to pay a premium to source for feedstock), and they are \also facing pressure from Indonesia peers who are getting cheaper CPO supplies.

Biodiesel mandate remains intact. 

  • Wilmar is also the largest palm oil-based biodiesel producer and has been getting the largest allocation from Pertamina for mandated blending volume in Indonesia. We expect Wilmar to receive the largest allocation from 2018’s biodiesel volume (which is expected to increase from 2017), which will result in a larger blending volume for 2018. 
  • To recap, Wilmar was awarded about 32% of the total awarded volume for the period of Nov 17 to Apr 18. Based on our channel check, biodiesel consumption in Indonesia was around 2.8m-2.9m kl for 2017 and is expected to increase to 3.2m-3.3m kl for 2018.

Expansion mode. 

  • Capex for 2018 is expected to be on par with that of 2017. We forecast capex of US$1b for 2018 vs US$879m in 2017. Management intends to further expand its businesses in rice, flour and related consumer products in China and other Southeast Asian countries. Currently, Wilmar’s rice and flour-related businesses in China are running at full capacity.

Potential listing of its China operations is on track. 

  • As of end-17, all of Wilmar’s businesses in China have been 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. For the initial offer, management is looking to float only 10% of its shares, and then slowly increase the float at a better valuation.


EARNINGS REVISION/RISK

  • Maintain earnings forecasts for 2018-19 and introduce 2020 earnings forecast. 
  • We forecast EPS of 19.8 US cents and 22.7 US cents for 2018-19 respectively and introduce 2020F EPS of 23.6 US cents.


VALUATION/RECOMMENDATION

  • 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 value the oilseeds and grains division at 20x 2018F PE to factor in a potential listing and assume this division is entirely based on its China operations. We value the tropical oils division at 15x 2018F PE, and the sugar division and other businesses at 10x 2018F PE respectively.



SHARE PRICE CATALYST

  • The potential listing of its China operations. As more details of its China operations are made available in the listing process, investors might see greater value in Wilmar.
  • Stronger-than-expected earnings growth.






Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.100 Same 4.100



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