Wilmar International - UOB Kay Hian 2019-04-30: 1Q19 Results Preview ~ Potentially Positive Surprise

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - 1Q19 Results Preview: Potentially Positive Surprise

Wilmar International is scheduled to release 1Q19 results on 10 May 19 evening. We are expecting core net profit of US$190m-210m (1Q18: US$183m). The weakness in soybean crushing as guided by management is likely to be offset by better performances from consumer packs, rice & flour operations, and tropical oil.
The focus now is on the upcoming China IPO. Our take is the IPO is likely to take place in 4Q19.
Maintain BUY. Target price: S$3.90.

The market is concerned that WILMAR INTERNATIONAL LIMITED (SGX:F34) could report weak 1Q19 results on poor soybean crushing margins. We estimate 1Q19 core net profit of US$190m-210m (1Q18: US$183m, 4Q18: US$334.7m).
The weakness in soybean crushing margins as guided by management is likely to be offset by better performances from consumer packs, rice & flour and tropical oil.
Sugar performance in 1Q19 would also be supported by the start of India’s sugar crushing season in 1H of the year.

The weakess in crushing margin in China should be compensated by higher sales volumes and margins from rice & flour and consumer packs in China. The oilseeds & grains division comprises soybean crushing, rice milling, flour milling and consumer packs in China.
During 4Q18 results briefing in Feb 19, management guided that crush margins for 1Q19 will be affected by the sharp decline in meal demand due to the outbreak of African swine fever in China and the sharp drop in Brazilian soybean prices. Since then, the market is concerned that this division could report a loss as in 2Q16 (pre-tax loss of US$344m).
Since 2016, Wilmar International has added new capacities to its rice and flour mills and sales growth from these two divisions has been stronger than from its soybean.

As the largest palm oil downstream player, Wilmar International continues to enjoy good downstream margins and higher utilisation (exceptionally high 1Q19 palm oil production in Malaysia and Indonesia). Palm oil and palm kernel oil prices remain subdued amid an oversupply.
Meanwhile, domestic and external demand for palm oil was good in 1Q19, driven by wider price discount to gasoil and soybean oil.
See also report: Wilmar International - UOB Kay Hian 2019-02-25: Look Beyound 1Q19; Wilmar Is Not Just A Soybean Crusher Or Palm Player.

Due to the sugar crushing season in Australia which starts only in late-May to December, Wilmar International usually report losses in 1H of the year and sugar profits will come mainly in 2H of the year when sugar sales start in Queensland, Australia.
For 2019, the sugar division would see positive contribution in 1H, also after the incorporation of Shree Renuka Sugars Ltd (58% stake). India’s sugar crushing season starts from October to June, so it will contribute nicely to Wilmar International’s 1H performance in the absence of sugar production from Australia.
In 2019, Wilmar International’s sugar business should also see a better performance as global sugar production is expected to be lower due to the drier weather in India and more sugar cane channels to produce ethanol (supported by better demand due to high crude oil prices).

For 1Q19 results announcement, we believe investors are more keened to find out about the status of Wilmar China’s listing in Shanghai A-shares. We are keeping to our view that the listing is likely by end-4Q19.

We maintain our net profit forecasts of US$1.24b and US$1.43b for 2019-20 respectively.
We introduce net profit forecast of US$1.51b for 2021.

This translates into 13.7x 2019F blended PE, which is slightly higher than Wilmar International’s five-year mean (1-year forward PE of 13.2x). We ascribe 20x 2019F PE for the oilseeds & grains division, 15x PE for the tropical oils division, 8x PE for the sugar division and 10x PE for the other businesses.
We believe there is still upside to Wilmar’s share price despite the 17% ytd rise as current share price is only factoring in 17x PE for its China operation.
Our fair value of S$3.90 factors in 20x PE for its China operation. Assuming 23x and 25x PE, our fair value would be S$4.10 and S$4.25 respectively.

Leow Huay Chuen UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2019-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900