Wilmar International - UOB Kay Hian 2018-08-15: Outlook Remains Positive

Wilmar International - UOB Kay Hian Research 2018-08-15: Outlook Remains Positive WILMAR INTERNATIONAL LIMITED SGX:F34

Wilmar International - Outlook Remains Positive

  • Wilmar remains positive on its outlook, given that the strong sales volumes and PBT margins from its tropical oils and oilseeds & grains segments are expected to sustain into 3Q18. We reckon Wilmar will continue to outperform its peers in the oilseeds and palm markets, given its larger market presence and size.
  • We have adjusted our earnings forecasts downwards by 3% and 10% after factoring in consolidated contributions from Renuka Sugar.
  • Maintain BUY. Target price: S$3.90.



WHAT’S NEW


On track to deliver good earnings despite high market volatility.

  • Post briefing, we remains positive on Wilmar International’s (Wilmar) 2H18 outlook and it is on track to meet our expectation of a US$1.1b net profit for 2018 (1H18: core net profit of US$535m). 
  • We are expecting the tropical oils and oilseeds & grains segments to contribute about 82-85% of Wilmar’s 2018F PBT (2017: about 73% of PBT).


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Palm refining margins to remain healthy with ample CPO production in Indonesia.

  • The good palm refining margins seen thus far are expected to sustain into 2H18 on a higher downstream utilisation rate, better pricing power for refiners (due to oversupply of feedstock and constrains of storage capacities at mills), and higher biodiesel sales volumes supported by higher mandated blending volume in Indonesia and higher exports.
  • For 1H18, the tropical oils division contributed about 35% of group PBT (+20% y-o-y) driven mainly by better PBT margins (+70bp y-o-y to 3.0% in 1H18 vs 2.3% in 1H17).

Oilseeds & grains division will continue to deliver a good performance

  • Oilseeds & grains division will continue to deliver a good performance with higher sales volumes and a high plant utilisation rate. Due to high soybean imports in 1H18, most of its soybean crushing plants were still running at high utilisation rates and this sustained soybean crushing margins (partly due to absence of the price distortion from the financial traders as well).
  • 2Q18 PBT per tonne (US$33.2/tonne) from this division was at a five-year high and this division contributed about 63.5% of 1H18 group PBT (+72.7% y-o-y).


Sugar crushing season around the corner

  • Sugar crushing season around the corner, but this segment’s performance could be dragged down by low sugar prices and consolidation of losses from Renuka Sugar. Sugar still reported losses in 2Q18 but the pre-tax losses reported for 2Q18 (loss of US$16.5/tonne) was one of the lowest vs the past 2Q and at much lower sugar price now.
  • We reckon the impact of the low sugar prices was offset by higher sales volumes from mill operations (due to the deferred sales for its Queensland operation) and better margins from its merchandising & processing division.


STOCK IMPACT


More action in India – The next growth market but still small relative to China.

  • Wilmar is increasing its presence in India with a higher stake in Renuka Sugar and a plan to takeover Ruchi Soya.

Increased stake in Renuka Sugar to 58.34%.

  • Wilmar increased its stake to 58.34% from 38.57% previously (booked under associate) through an open offer which closed on 26 Jun 18. For the financial year ending Mar 18, Renuka reported net losses of INR27.2b (or US$394m) largely due to high interest expenses (INR9.6b). For FY19 the losses could be narrower after paring down debts and also after disposing loss-making operations in Brazil. We expect greater operational synergy which would involve Wilmar’s wider sugar network and trading team after the merger.
  • Renuka is the largest sugar producer in India with integrated sugar operations (branded consumer pack sugar under the brand “Madhur”). The Madhur brand is a market leader in consumer pack sugar, but its presence is largely in western India and with Wilmar emerging as the largest shareholder, Renuka Sugar can now leverage on the Adani Wilmar pan-India distribution network to widen its sugar sales.
  • Wilmar emerged as a strategic shareholder of Renuka in 2014 to help the family-owned company cut its debts.

Approval to take over Ruchi Soya expected to come soon.

  • The Competition Commission, the fair trade regulator, has approved the acquisition of Ruchi Soya by Adani Wilmar. The final approval for this acquisition is expected to come anytime soon and the total cost of acquisition would be about US$600m (Wilmar has a 50% stake in Adani Wilmar or US$300m).
  • Ruchi Soya’s strong portfolio of mass-market edible-oil brands and a ready- made infrastructure of manufacturing plants are the main attractions. Based on media reports, Ruchi Soya's edible oil refining capacity stands at 3.3m tonnes p.a.. The company has around 13-14 refining plants across the country, of which five are port-based. With this acquisition, Adani Wilmar’s presence will almost double from existing locations.


EARNINGS REVISION/RISK


Adjusted earnings forecasts downwards.

  • We adjusted our earnings forecasts downwards by 3% and 10% for 2018 and 2019 after factoring in consolidated contributions from Renuka Sugar. Renuka’s financial performance is lacklustre due mainly to high interest expenses and low sugar milling and refining margins.
  • Renuka Sugar is expected to report smaller losses in the coming financial years after paring down its debts and consolidating its sugar trading position into Wilmar’s existing sugar trading team.


VALUATION/RECOMMENDATION


Maintain BUY and target price of S$3.90.

  • This translates into 13.7x blended 2019F PE, which is slightly higher than its 5-year mean (1-year forward PE of 13.2x).
  • We rolled over our valuation to 2019F but reduced our PE multiple for the sugar division to 8x vs 10x previously given that sugar prospects remain tough.
  • We are maintaining our valuation for oilseeds and grains division at 20x 2019F PE to factor in a potential listing and assuming this division is entirely based on its China operations. We value the tropical oils division at 15x and other businesses at 10x 2019F PE respectively


SHARE PRICE CATALYST


Potential listing of its China operations.

  • As more details of its China operations are made available in the listing process, investors might see greater value in Wilmar. The IPO shares are likely to be valued at 23x PE vs 20x PE applied to our current SOTP valuation. If we peg the China operations to 23x PE, this will add about S$0.30 to our SOTP target price.
  • The potential market capitalisation of Wilmar China could make up about 70-75% of Wilmar’s current market capitalisation. China operations contribute about 50-55% of Wilmar’s earnings.

Value enhancement M&A.

  • Depressed soft commodity prices are forcing the smaller and inefficient players to sell their assets and exit the industry. This will be an opportunity for larger and efficient players to consolidate their market positioning by purchasing those assets at reasonable prices and would provide value enhancement to acquirers.
  • Any good asset acquisition to gain new market access or better market positioning will be positive to Wilmar's business outlook.





Leow Huay Chuen UOB Kay Hian Research | Ooi Mong Huey UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-15
SGX Stock Analyst Report BUY Maintain BUY 3.900 Same 3.900



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