Wilmar International (WIL SP) - UOB Kay Hian 2018-05-14: Earnings Volatility Due To Timing Issues

Wilmar International (WIL SP) - UOB Kay Hian 2018-05-14: Earnings Volatility Due To Timing Issues WILMAR INTERNATIONAL LIMITED SGX: F34

Wilmar International (WIL SP) - Earnings Volatility Due To Timing Issues

  • We remain positive on Wilmar despite it missing our 1Q18 earnings expectation. We expect the shortfall in 1Q18 to be made up for over the next two quarters.
  • The delay in profit recognition was due to:
    1. timing of deliveries in the sugar division, and
    2. the lag impact from prices committed to earlier under soybean meal contracts, thus expansion in crushing margins has yet to be reflected.
  • We trim our 2018 earnings forecast on a lower sugar PBT margin estimate as sugar prices remain under pressure.
  • Maintain BUY. Target price: S$3.90.



WHAT’S NEW

  • Remain positive. We maintain our positive view on Wilmar International (Wilmar) despite it missing our 1Q18 earnings expectation. expectation. We expect the shortfall in 1Q18 to be made up for over the next two quarters.
    1. Timing of deliveries in the sugar division. The earnings miss for the sugar division was due to sugar deliveries being carried out later than expected. We estimate that only around 60% of 2017’s sugar production was sold over the last three quarters and the remaining could be delivered in the next quarter. If the remaining 40% is delivered in 2Q18, we will be able to see significant contribution from sugar milling.
    2. Better crushing margins to be reflected in the coming quarters. In our preview note, we expected a surge in China soymeal prices after China announced a 25% import duty on US soybean to boost Wilmar’s soybean crushing margin. However, its reported 1Q18 margin was lower than expected due to the lag impact. Management commented that the widening soybean crushing margin will be reflected only in the coming quarters as the volumes delivered in 1Q18 were sold forward much earlier before the price increase. The higher soybean meal prices would only be reflected in the coming quarters.
  • Higher palm oil production to give rise to better volumes and margins in 2Q18. As the largest palm oil refiner, Wilmar’s refining business will benefit from higher crude palm oil (CPO) production in the coming quarters. When production is low, refiners have to compete to source for raw materials by offering better pricing which would hurt margins. As CPO production is expected to go up as the El Nino impact fades, there will be ample raw material supply and pricing will be less competitive. 
  • The refining business is high volume, low margin operation, thus better margins only come during the high supply season and timing for sourcing is critical for a refiner to remain profitable.


STOCK IMPACT

  • Higher market volatility due to US-China trade war negotiations. Wilmar currently imports soybean from Brazil and the US (breakdown was not disclosed). If the proposed higher import duty of 25% is imposed, sourcing can be diverted to Brazil or Wilmar might crush fewer soybeans and replace some of the soybean meal component in animal feeds with other components such as corn meal or rapeseed meal. Wilmar’s crushing facilities are able to crush multiple feedstocks.
  • Expanding more into rice and flour business to reduce dependency on soybean related businesses. Wilmar is continuing with its expansion in rice and flour milling, noodles manufacturing, crushing and refining in China. The sales of rice and flour are profitable now and these sales contribute to about 20% of its consumer pack volume. This would be Wilmar’s key earnings drivers going forward. For 2017, Wilmar added one crushing plant and 2 rice milling plants in China in 2017. It is also expanding its rice and flour businesses in India, Vietnam and Myanmar.
  • China listing on track for 2Q-3Q19. As the China business restructuring was completed at the end of 2017, management also mentioned that they have cleared technical hurdles and is now waiting to record a one-year financial performance to submit its IPO application (likely to be in 1Q19). Management expects to float a 10% stake only, but it is yet to confirm if the floating shares are of the new issuance or a combination of new and existing shares.


EARNINGS REVISION/RISK

  • Adjusted earnings forecasts down by 6.5% for 2018 on lower sugar contribution. Global sugar prices remain under pressure due to strong global supply and are unlikely to see any significant recovery within this planting season. Thus, we have adjusted our sugar PBT margin assumption down from 2.5% to 1.0%.


VALUATION/RECOMMENDATION

  • Maintain BUY with a lower target price of S$3.90 (previous: S$4.10) based on revised earnings forecasts. This translates into 14.5x 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 assuming 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

  • 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. 
  • The IPO shares are likely to be valued at 23x PE vs our 20x PE applied in current SOTP valuation. If we peg the China operations to 23x PE, this will add about S$0.30 to our SOTP target price.
  • Stronger-than-expected earnings growth.





Leow Huey Chuen UOB Kay Hian | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-14
SGX Stock Analyst Report BUY Maintain BUY 3.90 Down 4.100



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