Wilmar International - RHB Invest 2018-08-15: Stronger Dividend, A Positive Signal

Wilmar International - RHB Securities Research 2018-08-15: Stronger Dividend, A Positive Signal WILMAR INTERNATIONAL LIMITED SGX:F34

Wilmar International - Stronger Dividend, A Positive Signal

  • Reiterate BUY with a higher Target Price of SGD3.69, from SGD3.51, 14% upside.
  • Wilmar is our Top Pick in the regional plantation sector. As the largest downstream player in the palm oil processing space, Wilmar continues to be a key beneficiary of an improving biodiesel and oleochemicals demand.
  • Moving into FY19F, we believe the IPO of Wilmar’s China operations will be a key catalyst.

Downstream margin to hold up tropical oils division over the next twelve months.

  • Wilmar’s downstream margin turned around in 2Q18 which is in part due to a rising demand for biodiesel on the back of a positive spread between gasoil and CPO.
  • Moving into FY19F, we note the Indonesian Government is pushing for higher biodiesel blending while discretionary demand from EU has also picked after removing anti-dumping duties. We believe these factors will continue to support the demand momentum going forward.
  • Since the margins for biodiesel are higher than those of palm oil refining, we expect Wilmar’s overall processing margins to be higher in FY19.

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Crushing margins for soybeans to remain strong next quarter

  • Crushing margins for soybeans to remain strong next quarter per the company’s CEO, Mr Kuok, as China has adequate soybean supplies and inventories to last for a few months. Wilmar is unlikely to take big positions on soybeans, given uncertainties of a trade war. Hence, we forecast crushing margins for soybeans to taper off to a normalised level in FY19F.
  • We do note that the end-product prices for soybean meal and soybean oil in China, have not adjusted for the US tariffs yet. As such, the group may still be able to generate strong margins post-3Q18, should it be holding on to excess inventories.

Wilmar raised its interim dividend by SGD0.005 to SGD0.035.

  • Mr Kuok believes full-year dividend should be slightly higher than last year’s despite an unexpectedly high final dividend of SGD0.07 announced in 4Q17 (4Q16: SGD0.04). We believe this signals management’s confidence in its 2H18 results and we raise our dividend expectation to SGD0.11 for the full year, which implies a dividend yield of 3.5%.

Reiterate BUY with a higher SGD3.69 Target Price.

  • We raised our FY18-20F earnings by 3-6% to account for the higher tropical oil downstream margins, stronger-than-expected crush margins and good performance of consumer products division.
  • We note that the IPO of its China operations remains on track to be completed in 2Q19 or 3Q19 and believe it will unlock some of the latent value of the stock.

Firing On All Cylinders

  • Wilmar International 2Q18 result highlights:
    1. Spectacular 2Q18 results, with core PATMI standing at USD352m, up >800% YoY. Although the YoY surge was in part due to the low base effect in 2Q17, the results were stronger – growing 92% QoQ despite being a seasonally weaker quarter. We note that the group was firing on all cylinders during the last quarter, with all three divisions – as well as associates – demonstrating better performances;
    2. Soybean was totally crushing it! Turning around from a weak crush margin in 2Q17, pretax profit from the oilseeds & grains segment grew >4x in 2Q18 as Wilmar took advantage of the sharp decline in US soybean prices – the result of the US-China trade war. Demand for consumer products also remained strong, demonstrating a 13% growth in revenue;
    3. Tropical oils downstream business made a comeback. FFB production grew 5%, in line with management’s guidance of 5- 10% growth for the full year. Although CPO prices were down YoY, leading to lower upstream plantation earnings, higher crude oil prices supported the demand and margins for Wilmar’s downstream oleochemicals and biodiesel businesses. Specialty fats also saw higher demand in the last quarter. As the downstream businesses generated much higher margins, the improved volumes pushed the division’s pretax profit up by 165% YoY;
    4. Losses from the sugar business were reduced, as a proportion of sugar produced in 2017 was sold in the last quarter as a result of the new Australian sugar marketing programme.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-15
SGX Stock Analyst Report BUY Maintain BUY 3.69 Up 3.510