Wilmar International - DBS Research 2019-02-22: Still A BUY On Undemanding Valuation

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

Wilmar International - Still A BUY On Undemanding Valuation

  • Wilmar's 2018 core earnings beat our expectation. 
  • Oilseeds and grains to drive 2019 earnings – despite expected 1Q19 performance hiccup. 
  • China operation listing is key upside risk to our Target Price.
  • Maintain BUY with a slightly higher Target Price of S$3.60. 



Reported 4Q18 profit was weighed down by impairments taken on sugar business – core profit beat our expectation.

  • Stripping out the one-off losses on asset discontinuation, WILMAR INTERNATIONAL LIMITED (SGX:F34)'s 4Q18 core net profit beat our estimate but was largely in line with consensus. Revenues came in at US$11.1bn (-3% y-o-y, -4% q-o-q) and core net profit at US$334.7m (+10% y-o-y, -23% q-o-q).
  • Profit before tax of S$303.1m (-45% y-o-y, -43% q-o-q) was largely weighed on by a US$139m impairment loss recognised in 4Q18 on Australia’s sugar milling operations’ goodwill and PPE which was taken in view of continued depressed sugar prices.


Where We Differ: Wilmar can withstand the trade wars.

  • We believe Wilmar is able to withstand the trade war tensions and will continue to book solid profitability as it maximises crushing capacity and efficiencies.
  • Wilmar’s downstream Tropical Oil division should also maintain its profitability amid the low CPO price environment. At the current price, we believe that the market has also priced in concerns over earnings fluctuations in its Tropical Oils as well as Oil, Seeds and Grains segments, on account of lower commodity prices.


Beyond earnings performance: Catalyst from listing of China operations.

  • Possible IPO plan (A-share listing) for its China operations may drive its share price at a time closer to its potential listing date. We note that China operations contributed c.60-70% of Wilmar’s pretax profits.


Valuation:

  • Our DCF valuation (FY19 based) changed slightly to S$3.60 (WACC 7%, TG 3%) post earnings revision. Its implies FY19 PE of 15.4x which we believe is undemanding as it is at par with pure upstream CPO planters, albeit half of PBT driven by non tropical oil busines.


Key Risks to Our View:

  • CPO and soybean prices. Wilmar’s share price is influenced by palm oil refining/soybean crushing margins on top of crude palm oil (CPO) and sugar price expectations.


4Q18: Crushed it in 2018


Reported 4Q18 profit was weighed down by impairments taken on sugar business – core profit beat our expectation.

  • Stripping out the one-off losses on asset discontinuation, Wilmar's 4Q18 core net profit beat our estimate but was largely in line with consensus. Revenues came in at US$11.1bn (-3% y-o-y, -4% q-o-q) and core net profit at US$334.7m (+10% y-o-y, -23% q-o-q).
  • Profit before tax of S$303.1m (-45% y-o-y, -43% q-o-q) was largely weighed down by a US$139m impairment loss recognised in 4Q18 on Australia’s sugar milling operations’ goodwill and PPE which was taken in view of continued depressed sugar prices.

Tropical Oils business – continued good downstream performances on satisfactory margins

  • Profit before tax from Tropical Oils segment was US$134.1m (+30% y-o-y, -14% q-o-q) due to continued performance in the manufacturing and merchandising and downstream businesses.
  • Downstream margins continued to be boosted by higher palm oil production volumes on top of lower feedstock costs, though partially offset by weaker contributions from plantations.

Oilseeds and Grains – affected by swine fever

  • Profit before tax declined to US$115.2m (-44% y-o-y, -61% q-o-q). Although consumer product sales volume continued to be strong (+14% y-o-y, -6% q-o-q), the division’s results was affected by the swine fever outbreak which affected meal demand and consequentially crush margins amid a volatile soybean market created by the trade tensions.

Sugar saw impairments

  • Loss before tax at US$114.1m (n.m.) was largely attributed to the impairment charge. Otherwise, profit before tax of US$24.5m (-66% y-o-y, -68% q-o-q) was weighed down by losses from SRSL as crushing activities only commenced in late October.

Higher share of joint ventures and associates

  • “Others” segment turned profitable (before tax) in 4Q18 to US$17.5m from 3Q18 (-80% y-o-y, n.m. q-o-q) while JVs and associates’ contribution of US$152.8m improved largely on Wilmar’s investments in China, Europe, and Vietnam (+37% y-o-y, +130% q-o-q).


Balance sheet: Stable gearing ratio

  • Ending cash & cash equivalents were higher at US$3.4bn (3Q18: US$3.2bn) while gross debts were relatively stable at US$23.3bn (3Q18: US$23.9bn). This translates into reported net gearing ratio of 0.84x (FY17: 0.79x).
  • Including liquid working capital, net gearing ratio would have been 0.41x (FY17: 0.26x), which has increased due to the consolidation of Shree Renuka Sugars as a subsidiary during 3Q18; 4Q18 capex (excluding associates) was higher at US$351.4m (FY18: US$1.3bn).


Earnings forecast: Cautious in 1Q19 but still optimistic for overall FY19 performance

  • Despite the stronger-than-expected core-earnings performance in 2018, we are conservatively keeping our FY19 earnings forecast for now at US$1.1bn. to take into account crushing margin performance in 1Q19 which could be adversely impacted by a sharp decline in meal demand from Africa swine fever in China. However, there is upside risk from Tropical Oil division which should benefit from recovering palm oil prices and downstream margin outlook. Meanwhile, we are slightly raising our earnings forecast for FY20 by 3% on better crushing margin outlook.
  • We believe our earnings forecast reflected what management mentioned in their FY18 presentation. Wilmar is “reasonably optimistic” that FY2019 performance will be satisfactory (previous: “cautiously optimistic”). Wilmar expects Tropical Oils to continue to do well in 2019 due to recovery of crude palm oil prices and satisfactory downstream processing margins, and also expects other divisions (with the exception of Oilseeds and Grains) to perform favourably.


Rating and target price: Maintain BUY rating with a slightly higher Target Price of S$3.60

  • We are keeping our BUY rating with a higher target price mainly driven by our new FY20 earnings and upward forecasts, while it is still within the street's 2020 average.
  • After Wilmar’s share price's good performance year to date, we believe it still has upside potential due to expectation over Wilmar's capability to deliver strong pre-tax profit performance on solid outlook this year. Moreover, Wilmar's valuation is still attractive at the current share price level.
  • We believe Wilmar’s valuation is undemanding considering it is pretty much in line with the CPO pure upstream peers
  • although approximately 50% of the company's profit before tax is contributed by the non plantation business such as Oilseeds and Grains business, which the profitability performance driver is not solely the commodities price trend but, management's capability to manage crushing margins, plant efficiencies and utilisation rate in volatile commodity price trend.
  • Plan to list its China business units also to uncover its lucrative China exposure which accounts for approximately 60%-70% of earnings contribution and signals that the units are mispriced for now as Wilmar's valuation is largely pegged to CPO plantation peers' share prices. Currently, the plan is on track despite no explicit time line. Wilmar has converted its China holding company into a joint stock company with a view of a possible separate listing in China.
  • China exposure which accounts for approximately 60%-70% of earnings contribution and signals that the units are mispriced for now as Wilmar's valuation is largely pegged to CPO plantation peers' share prices. Currently, the plan is on track despite no explicit time line. Wilmar has converted its China holding company into a joint stock company with a view of a possible separate listing in China.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 3.60 UP 3.590



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