Wilmar International - RHB Invest 2018-08-02: Trade War Jitters

WILMAR INTERNATIONAL LIMITED SGX:F34

Wilmar International - Trade War Jitters

Maintain BUY with lower SOP-based Target Price of SGD3.51 from SGD3.59, 12% upside.
We believe CPO prices have overreacted negatively to the trade war and expect to see some respite in 4Q18, post seasonal peak. However, given the larger-than-expected price reaction, we are cutting our CPO price assumptions for 2018-2019 to MYR2,400-2,500.
Our earnings have been cut by 6-8% for 2018F-2020F. On soybean, we note that Brazilian soybean prices have risen and are now at a c.20% premium to US soybean prices. However, we believe Wilmar can still generate positive crush margins even at these price levels.

Negative sentiment surrounding the trade war and the recent strength of the MYR have resulted in CPO prices falling to low levels of MYR2,100-2,200/tonne. While we think the negative reaction is overdone, we do not expect much price recovery over the next few months, as we head towards the seasonal peak output period.
We expect some price recovery in 4Q18 once the peak production period is over, and once the real impact of the trade war starts coming through.

~ SGinvestors.io ~ Where SG investors share

Given the magnitude of the recent CPO price decline, we no longer believe that our previous price averages for 2018-2019 are achievable. We are therefore cutting our price projections to MYR2,400/tonne for 2018 (from MYR2,550) and to MYR2,500/tonne for 2019 (from MYR2,700).
With the cut in price assumptions, our earnings for stocks under our coverage have been reduced accordingly. We highlight that the CPO price average does not include the impact of export taxes, which will reduce recognised selling prices further.

Brazilian soybean prices have increased and are now at a c.20% premium to US soybean prices as trade tariffs mean that China will be more dependent on Brazilian soybeans. Brazilian soybeans from the Santos port are now priced at c.USD10.55/bu, similar to peak levels of US soybeans in Apr 2018.
Nonetheless, we believe robust demand will support positive crushing margins at these price levels.

Risks include significant changes in the crude oil price trend that may result in a reversal of CPO and other vegetable oil prices, weather abnormalities resulting in an oversupply or undersupply of vegetable oils, significant changes in the demand for vegetable oils caused by changes in economic cycles or price dynamics, a continuous surge in Brazilian soybean prices, and trading losses in the sugar segment.

Post our CPO price revisions, we have cut our earnings forecasts for 2018-2020 by 6-8%.
We roll over our valuations to 2019 but lower our target P/E for the plantation segment to 11x from 12x to be in line with sector valuations. These changes have lowered our SOP-based Target Price to SGD3.51 from SGD3.59.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-02

SGX Stock Analyst Report BUY Maintain BUY 3.51 Down 3.590