Wilmar International - UOB Kay Hian 2018-10-18: 3Q18 Results Preview ~ Likely To Be Another Quarter Of Solid Earnings

WILMAR INTERNATIONAL LIMITED (SGX:F34) | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - 3Q18 Results Preview: Likely To Be Another Quarter Of Solid Earnings

  • Wilmar is expected to release its 3Q18 results on 12 Nov 18.
  • 3Q18 is expected to be another good quarter (+11-+22% q-o-q, +21-+33% y-o-y), supported by the oilseeds & grains and palm & lauric oils divisions.
  • Earnings risk could come from the sugar segment, given the low sugar prices and incorporation of Renuka Sugar.
  • We expect 3Q18 core net profit to come in at US$390m-430m. If Wilmar does meet our estimate, our 2018 core net profit forecast might be upgraded by 10-15%.
  • Maintain BUY. Target price: S$3.90.



WHAT’S NEW


3Q18 results preview: Likely to be one of the best sets of 3Q earnings.

  • Wilmar International is expected to announce its results on 12 Nov 18 after the market close.
  • Based on our tracking indicators, Wilmar’s 3Q18 core net profit could come in between US$390m to US$430m. The risk to this earnings estimate is likely to come from the earnings uncertainty from the sugar division.

Oilseed & grains: Expected to post another quarter of performance.

  • For 3Q18, we expect this division to post a higher PBT y-o-y and q-o-q.
  • Based on industry data, soybean crushing margins declined q-o-q in 2Q18 after soybean meal prices had weakened but recovered in 3Q18. Factoring in some lag impact, we might see a flat or slightly lower PBT margin for this division in 3Q18. This should be offset by higher festive demand.


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Palm & laurics: Better downstream margins from higher utilisation rate.

  • Key drivers were higher sales volumes on the back of higher biodiesel sales volumes in Indonesia, increase in exports and better refining margins on a higher utilisation rate.
  • The additional allocation of mandated biodiesel volumes only kicked-in in Sep 18. Hence, 3Q18 only captured a one-month impact from the additional allocation.
  • 4Q18 should see higher biodiesel sales volumes in Indonesia following the allocation of additional volume to facilitate supply to the non-public sector obligation (PSO) segment. This division could deliver better results given that refiners in Indonesia have better pricing power due to large CPO supply in 3Q18.

Sugar: Cloudy outlook.

  • 2018 has been a tough year for the segment given that sugar has been seeing a declining price trend despite higher sugar sales volumes. PBT contribution from the existing sugar business will be offset by the incorporation of losses from Renuka Sugar India. Thus, we will not be too surprised if we see a significantly lower sugar PBT or even a loss in 3Q18.
  • However, the impact on PATAMI is expected to be marginal at 2-3% only. In our current core net profit estimates, we are factoring breakeven for sugar in 3Q18. The recent recovery of sugar prices should be good for Wilmar’s milling earnings in the coming financial year.


EARNINGS REVISION/RISK


Maintain earnings forecasts for now with potential upgrade post 3Q18 results briefing.

  • We are forecasting an EPS of 18.0 US cents, 19.8 US cents and 23.3 US cents for 2018, 2019 and 2020 respectively. We might need to adjust our 2018 core net profit forecasts by 12-15% from US$1.15b to US$1.27b-1.32b if Wilmar’s 3Q18 results meets our expectation and on seasonally strong 4Q earnings (we do not expect any negative surprises).


VALUATION/RECOMMENDATION


Maintain BUY with a target price of S$3.90.

  • This translates into 13.7x blended 2019F PE, which is slightly higher than Wilmar’s 5-year mean (1-year forward PE of 13.2x).
  • We rolled over our valuation to 2019 but reduced our PE multiple for the sugar division to 8x vs 10x previously given that sugar’s prospects remain tough. We are maintaining our valuation for the oilseeds & grains division at 20x 2019F PE to factor in a potential listing and with the assumption that this division runs entirely 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 China operations.

  • As more details of its China operations are made available in the listing process, investors might see greater value in Wilmar. 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 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/ 2018-10-18
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900



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