Wilmar International - RHB Invest 2018-12-14: Diversified Play In The Plantation Sector


Wilmar International - Diversified Play In The Plantation Sector

  • Wilmar is our Top Pick for the plantation sector. Maintain BUY and Target Price SGD3.58, 14.0% upside.
  • Given an unexciting year for CPO prices, we think Wilmar is likely to outperform the sector on more favourable palm processing margins, strong biodiesel demand, and continued growth at its consumer pack products.
  • Potential listing (A-shares) of its China operations is still on the plate, and is expected to take place by end-FY19. We believe the IPO of its China operations could unlock some latent value and lead to potential special dividends.

Stronger palm refining margin to offset lower CPO prices.

  • CPO prices have been weak as a result of high inventory levels and decline in crude oil prices. While this is negative for Wilmar’s upstream earnings, we note that its plantation segment is still profitable even when CPO prices hit the low of MYR1717/tonne on 21 Nov.
  • We believe the decline in upstream earnings could be partially offset by stronger palm refining margins, which have improved since 3Q18 due to lower input cost.

Further positives from biodiesel.

  • Rising biodiesel mandates in Malaysia and Indonesia can raise CPO demand by 3-4m tonnes pa, and support CPO prices. Higher demand for biodiesel is also beneficial for Wilmar given that it is the largest biodiesel producer in these two countries.

Factors surrounding soybean crushing margin:

  • Trade war ceasefire – Neutral. US soybean prices have been depressed due to the 25% tariff. Chinese players as well as Wilmar have been importing Brazilian soybeans since the trade war. While Brazilian soybean prices are trading at a premium of c.25% to US soybean prices, this is not significantly different from US soybean prices pre-trade war. Should the trade war subside, we believe both US and Brazil soybean prices will adjust accordingly. Thus, we think there will be minimal net impact on China input costs for soybeans;
  • Outbreak of African swine fever – slight negative. We note that the impact on soybean meal demand is not significant at the moment. According to xinhuanet.com news, China has culled 631,000 pigs YTD due to the fever. This is insignificant vs the 700m pigs China consumes each year;
  • Fall of other soybean crusher/importers – positive. The bankruptcy of Shandong Sunrise group, one of the larger soybean players in China, is likely to be benefit Wilmar in terms of spillover demand.

BUY with Target Price SGD3.58; China IPO a catalyst.

  • Wilmar is our Top Pick in the plantation sector.
  • Apart from being the largest edible oil processor in the world, Wilmar is also the leading producer of branded consumer pack oils, rice and flour in China.
  • Our SOP valuation suggests that the current FY19F P/E of 12x is undemanding, and the IPO of its China operations could unlock latent value, leading to special dividends.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 3.580 SAME 3.580

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