Wilmar International - DBS Research 2018-08-14: Decent Earnings Performance 

Wilmar International - DBS Group Research 2018-08-14: Decent Earnings Performance  WILMAR INTERNATIONAL LIMITED SGX:F34

Wilmar International - Decent Earnings Performance 

  • Decent 2Q18 earnings performance.
  • Strong performance from Oil Seeds and Grains division.
  • Undemanding valuation; concern on trade war priced in.
  • Maintain BUY with slightly higher Target Price of S$3.61.

We keep our BUY rating and raise Target Price to S$3.61.

  • Wilmar posted a strong 2Q18 performance, with earnings ahead of our expectations but in line with consensus. We keep our forecast for now despite the decent earnings performance in 2Q18, keeping an eye on US-China trade war development, and China’s crushing margin trend.
  • We forecast core earnings to grow by 6% y-o-y to US$1.09bn in 2018. 
  • Better than expected oil seeds and grains profitability performance in 2H18 is the key potential upside risk to our earnings forecast.

Where we differ:

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Market has priced in mild earnings performance.

  • At the current Wilmar share price, we believe that the market has fully priced in 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 under-estimating 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 listing of China operations.

  • 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.


  • We rolled forward the base year in our DCF methodology (to FY19F to arrive at our slightly higher Target Price of S$3.61 (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. 

WHAT’S NEW - Decent performance amid trade war concern

2Q18 performance: Earnings ahead of our expectation

  • Wilmar’s 2Q18 revenues and net profit well ahead of our expectations. Revenues of US$10.7bn (+2% y-o-y, -3% q-o-q) and core net profit of US$351.8m (+875% y-o-y, +92% q-o-q) were well ahead of our expectations.

Tropical Oils – better midstream and downstream performances

  • Profit before tax from Tropical Oils segment was US$154.9m (+160% y-o-y, +52% q-o-q) as both midstream and downstream businesses performed better, and the downstream business recovered from poorer margins in 1Q18. Plantation production yield continued to improve to 5.8 Mt/ha (+11% y-o- y, +18% q-o-q) on favourable weather conditions amid marginally lower sales volume.

Oilseeds and Grains – exceptional performance this quarter

  • Revenues improved to US$5.3bn (+22% y-o-y, -6% q-o-q) as Wilmar continues to benefit from higher volume and good crush margins amid strong y-o-y sales volumes across Oilseeds & Grains Manufacturing and Consumer Products, although
  • Consumer Products’ volumes declined for the quarter due to the Chinese New Year seasonal effect in 1Q18. Profit before tax improved to US$290.2m, nearly four-fold increase from last year(low base effect) and 68% increase q-o-q.

Sugar losses narrowed y-o-y

  • Losses before tax from the Sugar segment narrowed to US$46.2m (2Q17: -US$106.8m, 1Q18: -US$39.0m) as merchandising and processing operations saw better performances this quarter. 
  • In previous quarters, Wilmar indicated that the anticipated increase in sales volume in the Australian Milling business is expected to be recognised in subsequent quarters. This was evident in 2Q18’s improvement in Milling sales volumes where a portion of 2017’s sugar production was sold.
  • “Others” segment had a loss of US$26.3m largely attributed to losses from investment securities while JVs and associates’ contribution of US$49.6m improved largely led by Wilmar’s China and Europe associates (2Q17: US$23.2m, 1Q18: US$41.5m).

Balance sheet : Stable gearing ratio

  • Wilmar’s ending cash & cash equivalents were lower at US$3.5bn while gross debts expanded to US$23.4bn due to consolidation of Shree Renuka Sugars as a subsidiary during the quarter. This translates to a net gearing ratio of 0.82x (FY17: 0.79x).
  • Including liquid working capital, net gearing ratio would have been 0.41x (FY17: 0.26x); 2Q18 capex (excluding associates) was higher at US$364m (2Q17: US$209m).

Higher dividends – a positive catalyst for share price

  • Wilmar declared a higher dividend of 3.5 Scts/share for 1H2018 (1H2017: 3 Scts/share). 
  • Higher full year dividend is possible if Wilmar continue to post solid earnings as seen in 1H18.


Keeping our forecast, trade war is the wild card 

  • Wilmar remains “cautiously optimistic” that FY18’s performance will be satisfactory – unchanged from 1Q18’s outlook. Wilmar expects its consumer products, rice and flour milling divisions to perform “reasonably well” in coming quarters. Low palm oil prices affected Wilmar’s plantation business but at the same time, downstream businesses also benefited from higher demand and better margins. Wilmar expects its sugar performance to improve in 2H2018.
  • 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.
  • Despite the decent performance, we keep our earnings forecast for now, as the lag effect of low soybean price in 2Q18 may affect Wilmar’s oil seeds and grains division earnings performance in 2H18.

Impact from trade tensions between the US and China

  • In the short term, Wilmar’s oilseeds crushing business will benefit from better crush margins. However, intensifying trade tensions may lead to lower plant utilisation, and thus have a negative impact on crush margins.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-08-14
SGX Stock Analyst Report BUY Maintain BUY 3.61 Up 3.500