Wilmar International - DBS Research 2018-07-02: Concerns Priced In

Wilmar International - DBS Vickers 2018-07-02: Concerns Priced In WILMAR INTERNATIONAL LIMITED SGX: F34

Wilmar International - Concerns Priced In

  • Edible oil division to support earnings performance.
  • Oilseeds & grains margin remain the key earnings performance.
  • Undemanding valuation post share price drop.
  • Maintain BUY with new Target Price of S$3.50.



We keep our BUY rating but with a lower Target Price of S$3.50.

  • We lowered our earnings estimates to take into account higher input cost as seen in its peers, and slightly lower crushing margins as a result of the impact on crushing capacity utilisation rate caused by the potential China US trade wars.
  • All in all, we believe Wilmar International’s profitability performance will remain positive on still steady crushing margins and CPO price recovery which would support its tropical oil division.


Where we differ: Market has priced in mild earnings performance.

  • At the current price, we believe that the market has fully priced in the concerns over earnings fluctuation in its Tropical Oils as well as Oil Seeds and Grains segments, due to lower 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 Adani- Wilmar’s proposed JV with Ruchi), and gradual penetration of its well-established brands – including Goodman Fielder – in China.


Beyond earnings performance:

  • Catalyst from China operations' listing. Possible IPO plan (A-share listing) for its China operations may drive its share price at a time closer to its potential listing date. Wilmar is expected to file for an IPO in 1H19 at the earliest. We note that China operations contribute c.60% of Wilmar’s pretax profits.


Valuation:

  • We have employed DCF methodology (FY18F as base year) to arrive at our revised Target Price of S$3.50 (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.


A look at Wilmar’s listed history – what drives its share price?


CPO prices (in IDR) as a critical factor.

  • Palm oil price is the key catalyst for plantation stocks; Wilmar’s share price movements generally tracks palm oil spot prices. However, the outperformance and underperformance of plantation stocks to CPO price are dictated by the productivity factor i.e. stronger- or weaker-than-expected yields.
  • Wilmar’s share price correlation with CPO prices over the last 16 years is ~76%, the highest among SGX-listed plantation stocks.

Soy crushing margin vs. Share price performance.

  • While historically, spot margin calculations had no direct correlation with Wilmar’s Oilseeds & Grains pretax margins, soy crushing margin had a correlation of ~67% with Wilmar’s share price from Jan – Jun 2017. Thereafter, the relationship broke down with improving soy crushing margins.
  • Wilmar hedging strategy offers some protection to its consolidated profitability, with consolidated pre-tax losses recorded only in 1Q16 since 2008.

Operating profit margin as a critical factor.

  • Wilmar’s share price direction generally tracks that of its operating profit margin (OPM), with the exception of 2Q16 where Wilmar recorded significant realised mark-to-market losses in its short positions.





William Simadiputra DBS Vickers | Rui Wen LIM DBS Vickers | https://www.dbsvickers.com/ 2018-07-02
SGX Stock Analyst Report BUY Maintain BUY 3.50 Down 3.650



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