Wilmar International - CGS-CIMB Research 2019-02-25: Listing Of Wilmar China The Key Re-rating Catalyst


Wilmar International - Listing Of Wilmar China The Key Re-rating Catalyst

  • WILMAR INTERNATIONAL LIMITED (SGX:F34) has successfully grown its consumer products business to 30% of FY18 total pretax profit. This will help reduce future earnings volatility.
  • We estimate Wilmar China's market cap could be higher or similar to Wilmar's current market cap, if accorded FY18 P/E of around 17x to 20x.
  • Maintain ADD call as current Wilmar International share price has not reflected plans to unlock value of its assets in China via a listing in Shanghai as early as 2H19.

Key takeaways from Wilmar International's FY18 results briefing

  • It remains on track to list Wilmar China, the holding company for the group’s operations in China.
  • The group’s operation in China contributed around 70% of its FY18 total profit.
  • The soybean crush margin is expected to be weaker in 1Q19 but set to improve in 2Q19.
  • The tropical oils profit is expected to improve due to higher CPO prices and processing volumes.
  • The consumer products segment has continued to grow over the past year and accounted for 30% of its FY18 total pretax profit.

Swine fever may impact oilseeds and grains profit but...

  • Wilmar International guided for a lower oilseeds and grains profit in 1Q19 due to weaker demand for soybean meal following the outbreak of African swine fever and a sharp drop in the Brazilian soybean basis. However, it expects the crush margin to improve in 2Q19.
  • The weaker oilseeds and grains profit will be tempered by better performance from the tropical oils division in 2019 due to rising CPO prices, which will benefit both its upstream and processing businesses.
  • The sugar division is also expected to perform better due to the absence of provisions and better performance from Shree Renuka.

… keeping to our earnings estimates

  • We are keeping to our FY19-21 earnings forecasts, where we project Wilmar to report an 8% decline in FY19 core net profit due to lower soybean crushing margins.
  • However, we expect the group to post 6-7% net profit growth in FY20-21, driven by sales volume growth and its plans to expand its consumer products and downstream businesses to stabilise the group’s net profit over time.

4Q18 results impacted by sugar impairment charges

  • Wilmar International explained that the 4Q18 reported net profit fell 53% to US$201m due to one-off non-cash impairment provisions for its sugar assets totalling US$138.6m. Excluding the non-operating items, core net profit fell 10% y-o-y and 23% q-o-q to US$335m due to weaker contributions from the oilseeds and grains as well as sugar segments.
  • Oilseeds and grains performance was impacted by weaker demand for soybean meal due to the African swine fever, while its sugar division was hit by the low sugar prices in 4Q18.

Explaining the sugar impairment charges

  • Wilmar International explained that it is required to conduct annual impairment testing on its assets. Despite consistent positive cash flow generated from its Australia milling business, the decline in sugar prices in the past year led the group to take a prudent stance and impair the goodwill by US$107.4m and property, plant and equipment of the milling assets by US$30.9m in 4Q18.
  • Wilmar International used an independent source to undertake the impairment testing for its sugar assets. The provision was mainly to reflect the reduction in the terminal value of the sugar assets at current raw sugar prices of around 12-13 cents/lb, which is lower than the raw sugar price of 16.7 cents/lb when Wilmar bought Sucrogen, which owns the sugar milling assets, in Australia in July 2010.

Final core net profit was a 7-year high, above expectations

  • Wilmar International posted a 27% rise in its FY18 core net profit to US$1,305m, the highest core net profit since 2011. The final core net profit was also 18% above our estimate and 8% above market expectations.
  • The key drivers behind the strong earnings were the oilseeds and grains as well as the associates and joint ventures divisions. Both these segments have posted record performances since Wilmar’s listing, revealing that the group’s investment over the years is starting to yield results. However, the strong earnings from these divisions were tempered by losses in the sugar division and lower contribution from the ‘other’ segment.
  • The group credited its stable earnings as well as success in achieving growth in the current challenging operating environment to its strategy to develop more stable downstream processing and branded consumer products.
  • Wilmar International’s consumer products division accounted for 30% of its total pretax profit in FY18. Its share of profit has gone up from 12% of total profit in FY13.

Oilseeds and grains post record-breaking profit in FY18

  • The oilseeds and grains segment posted a record-breaking pre-tax profit of US$875m in FY18 despite facing challenges, which include US-China trade tensions (which has led China to impose a 25% import duty on soybeans from US in July 2018) and the outbreak of the African swine fever, which was reported in August 2018 and has led to the culling of 1m pigs out of China’s pig population of 430m, lowering demand for soybean meal in China.
  • The strong crush margins and volumes enjoyed in 9M18 were due to the group’s timely purchase of raw materials and favourable industry crush margins. On top of this, its consumer products division also did well.

Associates complemented with record earnings

  • Shares of associates’ results and joint ventures of the group also did well, posting record profit, thanks to stronger profit contributions from its investments in China, Europe and Vietnam.
  • In China, the key contributors were its 44% stake in COFCO East Ocean Oils and Grains Industries and 25% stake in Shandong Luhua Fragrant Peanut Oil Co Ltd.
  • Its key associates in Europe is via its joint venture with ADM in Olenex Holdings B.V.
  • The strong Vietnam contribution came from its joint venture with Bunge and Quang Dung to create an integrated operation that is both a source and sales outlet for edible oils in Vietnam.

Tropical oils and sugar impacted by lower commodity prices

  • The tropical oils segment registered a 37% rise in PBT to US$546m in FY18 despite lower CPO prices, thanks to stronger profit from its processing division. Wilmar International does not disclose the profitability of its upstream plantation, which forms part of the tropical oil segment earnings. We gathered that the group achieved lower CPO prices of US$520 per tonne in 2018 (2017: US$600 per tonne) while cost of production for both years was flattish at US$400 per tonne.
  • FFB output from its upstream business grew 7% to 4.19m tonnes. We roughly estimate that the group’s upstream business, which comprises of 230,409 ha of planted oil palm estates, could have registered around US$100m PBT.
  • The sugar division posted higher losses of US$123m in FY18 against US$24.6m in FY17. This was due to impairment loss of US$138.6m recognised in 4Q18. Excluding this, the sugar division posted a profit of US$24.5m in 4Q18 and US$15.6m in FY18.

Outlook for 2019

  • Wilmar International expects its tropical oils division to do well in 2019 due to the recovering crude palm oil prices and expectation that downstream processing margins will be satisfactory. In our view, Wilmar International could benefit from the recovering CPO price via better upstream profit as well as higher downstream profit (if it had locked in feedstocks for its downstream business at low CPO prices in 4Q18). On top of this, the group is also expected to benefit from higher biodiesel demand in Indonesia as it is the largest biodiesel producer in the country.
  • The oilseeds and grains division is likely to record lower crush margins in 1Q19 due to the sharp drop in the Brazilian soybean basis and a sharp decline in meal demand due to the outbreak of African swine fever in China. However, Wilmar expects the oilseeds and grains division earnings to improve in 2Q19.
  • Wilmar International also expects its other businesses to perform favourably in 2019 and are reasonably optimistic that performance for FY19 will be satisfactory.
  • We project Wilmar International to report an 8% drop in FY19 net profit due to lower oilseeds and grains contribution. However, we expect the group to post a 7% jump in its FY19 reported net profit due to the absence of provisioning for its sugar assets.

Wilmar China listing expected to unlock value

  • Wilmar International reported that it recently converted its China holding company into a joint-stock company and indicated that it planned to list its China operations, which accounted for around 70% of its pre-tax profit in FY18. We expect the potential listing of Wilmar China, likely to take place as early as 2H19, to be a key re-rating catalyst as we believe the listing will unlock value for the group as it may be able to garner up to a max P/E allowed for new listing in Shanghai of 23x and assuming the group offers the minimum 10% new shares during listing.
  • Wilmar China could be worth US$12.5bn to US$21bn, based on 16-23x P/E on estimated FY18 net profit of Wilmar China, against the group’s current market cap of US$15.5bn.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-25
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