Wilmar International - RHB Invest 2018-07-04: Opportunity To Buy During Market Uncertainty

Wilmar International - RHB Invest 2018-07-04: Opportunity To Buy During Market Uncertainty WILMAR INTERNATIONAL LIMITED SGX:F34

Wilmar International - Opportunity To Buy During Market Uncertainty

  • Reiterate BUY, with Target Price of SGD3.59 reflecting 18% upside.
  • We believe Wilmar’s share price has come down on the back of looming uncertainties over the imminent China-US trade war. However, US soybean prices have also plummeted significantly since the 25% tariff recommendation. This should help to mitigate pressure on its raw material costs, even if the tariff was implemented. As such, we think the recent retracement in share price offers a good opportunity to accumulate the stock.

Low soybean prices mitigate tariff fears.

  • With soybean as one of its key commodities, Wilmar is likely to be affected by a trade war between the US and China. However, we believe all is not bleak for the company.
  • The Chicago soybean futures contract has declined by 20% to USD8.48/bu from its peak in March, after the tariff recommendation. io. Therefore, even if the 25% tariff comes into effect, the cost of US soybeans (futures price + 25% import duties) is likely to increase to USD10.60/bu, similar to pre-trade war levels. This is still much lower than the average soybean price of USD13.58/bu in 2011-2014 – where Wilmar made an average annual pretax margin of USD9.45/tonne from the oilseeds crushing business alone, excluding the consumer pack business. io.
  • Given today’s higher utilisation rate of the crushing facilities and lower soybean prices, we think our current margin assumptions of USD12.50/tonne and USD12.00/tonne for FY18-19 are achievable.

Not much impact this year.

  • The next harvesting cycle for US soybeans is going to only start in September. From now until November, China is likely to import most of its soybeans from South America. This gives more time for China and the US to negotiate soybeans out of the tariff list.
  • Currently, Brazil soybeans from the Santos port are priced at around USD9.77/bu, a 15% premium to US soybeans. Even so, we note that this is about 3% lower than the average US soybean prices in 1Q18, when Wilmar recorded a decent crush margin.
  • In addition, in our latest conversation with its investor relations team last Monday, the group continued to express confidence in the full-year performance of its oilseeds division.

Share buy-back by director and CEO signals confidence.

  • We note that CEO, Mr Kuok Khoon Hong, and non-executive director, Mr Kuok Khoon Hua have been buying back shares from the open market at prices between SGD3.04 and SGD3.20. io. We believe this signals management’s long-term confidence in the group.
  • The recent Wilmar's share price retracement offers good buying opportunities, as the stock price is now below what the CEO paid.

A buying opportunity.

  • Reiterate BUY, with an unchanged Target Price of SGD3.59.
  • Our forecasts remain largely unchanged as we believe the China-US trade tariffs should not have a major negative impact on Wilmar’s earnings.
  • Although CPO prices remain soft, we think the company’s tropical oil segment could be supported by stronger biodiesel demand this year.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-07-04
SGX Stock Analyst Report BUY Maintain BUY 3.590 Same 3.590