Wilmar International - DBS Research 2018-05-11: Margin Recovery To Drive Earnings Performance

WILMAR INTERNATIONAL LIMITED SGX: F34

Wilmar International - Margin Recovery To Drive Earnings Performance

Wilmar International’s core earnings reached US$183.5m – below our expectation.
Revenue in line – oilseeds & grains offset tropical oils performance.
CPO price and normalising crushing margin to drive margin improvements for rest of the year.
Maintain BUY with Target Price of S$3.65.

Wilmar International’s core earnings reached US$183.5m (-37% y-o-y, -51% q-o-q, reported NPAT US$203.3m). This was below our forecast on slower than expected bottom line margin expansion mainly due to two key factors :
1. the low CPO price trend in 1Q18 which had hit the tropical oil division margin, both upstream and downstream, and
2. oilseeds and grains crushing margins which was slightly below our expectation despite volume surge ahead of the Chinese New Year festive season in 1Q18.

Wilmar International’s revenue reached US$11.2bn (+6% y-o-y, -3% q-o-q) in 1Q18, in line with our forecast.
Stronger than expected revenue from the oil seeds and grains division was led by robust sales volume performance, which had offset the weak tropical oil division mainly on lower crude palm oil (CPO) price trend y-o-y.

Revenues improved to US$5.7bn (+27% y-o-y, +4% q-o-q) as both manufacturing and consumer products saw strong growth on higher sales volume due to higher crushed volumes and consumer products sales attributed to the Chinese New Year effect.
Profit before tax was lower at US$172.6m (-17% y-o-y, -16% q-o-q) on lower margins.

Profit before tax from Tropical Oils segment was US$101.7m, largely steady q-o-q but down 35% y-o-y due to higher CPO prices last year.
Results were also impacted by poor margins in the downstream businesses amid improvement in plantation production yields on favourable weather conditions and sales volume. This is consistent with other plantation companies’ results reported thus far.

Losses before tax from Sugar segment widened to US$39.0m on lower sales volume due to lower milling and merchandising activities, which were mitigated by steady performance from merchandising. Wilmar has stated that the anticipated increase in sales volume in the Australian Milling business is expected to be recognised in subsequent quarters.
“Others” segment had a lower profit before tax of US$36.1m mainly on absence of investment gains on weaker equity market conditions while JVs and associates’ contribution of US$41.5m saw mixed performance – African and Indian investments were offset by China and Vietnam’s performances.

Wilmar is “cautiously optimistic” that FY18 performance will be satisfactory. We believe that Tropical Oils will perform better in the next three quarters on improved production yields, resilient average selling price (ASP) and better margins in the downstream operations. Sugar is also expected to see higher sales volumes in the coming quarters.
A wild card at this point would be the prospect of China tariffs on US soybeans which may affect crushing utilisation in the longer term, which should be partially offset by the flour and rice business.
We are keeping our forecast unchanged for now on the expectation on performance support from tropical oil division on higher CPO price expectation for the rest of the year. Our CPO price forecast is RM2,620 per MT (US$616 per MT), underpinned by expectations of a gradual improvement in supply and demand dynamics for the rest of this year on softer output expansion y-o-y, coupled with steady export performance.
Our financial forecast also reiterates our bullish view towards Wilmar’s oilseeds and grains division.

We maintain our BUY rating with unchanged target price of S$3.65 based on Discounted Cash Flow (DCF) methodology (WACC : 7%, TG : 3%), which implies 14.4x FY18F PE.
Wilmar’s valuation is undemanding considering its prolonged share price correction in the last two years – it is trading at 12.7x FY18F P/E – below five years average P/E multiple of 14.3x.

William Simadiputra DBS Vickers | Rui Wen LIM DBS Vickers | https://www.dbsvickers.com/ 2018-05-11

SGX Stock Analyst Report BUY Maintain BUY 3.650 Same 3.650