Wilmar International - DBS Research 2019-05-13: A Good Start Amid Tough Environment

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

Wilmar International - A Good Start Amid Tough Environment

  • A good start amid tough environment in 1Q19.
  • Tropical oil refining margin led the way.
  • Raise earnings by 5% on better CPO refining margin.
  • Maintain BUY with higher Target Price of S$3.86.



Wilmar's 1Q19 performance saved by Tropical Oils division.

  • Core net profit reached US$250m (+36% y-o-y, -25% q-o-q) ahead our estimate due to stronger-than-expected profit before tax of US$326m (+6% y-o-y, +6% q-o-q) led by better-than-expected Tropical Oils division profitability on lower input cost. The division generated a profit before tax (PBT) of US$183.8m (+81% y-o-y, +37% q-o-q), which offset the anticipated weak Oilseeds & Grains division PBT of US$91.1m (-47% y-o-y, -21% q-o-q).


Where We Differ: Wilmar can withstand the trade wars.

  • We believe WILMAR INTERNATIONAL LIMITED (SGX:F34) is able to withstand the trade war tensions and will continue to book solid profitability as it maximises crushing capacity and efficiencies. Moreover, Wilmar’s downstream Tropical Oils division should also maintain its profitability amid the low CPO price environment. At the current Wilmar share price, we believe that the market has also priced in concerns over earnings fluctuations ahead, 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. China operations contributed c.60-70% of Wilmar’s pretax profits.


Valuation:

  • Our DCF valuation (FY19 based) has increased to S$3.86 (WACC 7%, TG 3%) post earnings revision. This implies FY19 PE of 15.6x which we believe is undemanding.


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.


WHAT’S NEW - A good start amid tough environment


1Q19: Tropical Oils division led the way

  • The stronger-than-expected Tropical Oils division was the key driver of sublime 1Q19 performance. Core net profit reached US$250m (+36% y-o-y, -25% q-o-q) ahead our estimate due to stronger-than-expected profit before tax of US$326m (+6% y-o-y, +6% q-o-q) led by stronger-than-expected Tropical Oils division profitability on lower input cost.

Tropical Oils division: Better-than-expected refining margin

  • Tropical Oils division’s top line was weaker at US$3.8bn (- 13% y-o-y, -7% q-o-q) due to lower average selling prices amid the low palm oil price environment in the quarters. However, Wilmar’s manufacturing and merchandising businesses recorded better sales volumes and margins despite the challenging conditions. Profit before tax reached US$183.8m (+81% y-o-y, +37% q-o-q).

Oilseeds & Grains: Soft performance came as expected

  • Oilseeds & Grains division’s profit before tax in 1Q19 was lower at US$91.1m (-47% y-o-y, -21% q-o-q) due to the well-anticipated crushing margin performance as management highlighted during the 4Q18 analyst briefing. However, the segment saw stronger contributions from the Consumer Products, Rice & Flour milling businesses. These helped offset the poor results from the crushing business, which had been impacted by the African swine fever outbreak in China and the sharp drop in Brazilian beans basis. The negative impact had been mitigated by reduced crushing activities and good management of Wilmar’s bean inventory.

Sugar: Back in the black

  • Sugar’s pretax reached US$1.7m after posting pretax losses of US$39m and US$114m in 1Q18 and 4Q18 respectively. The performance was driven by stronger performance from refining and merchandising activities. The improvement in segment results was further boosted by contributions from Shree Renuka Sugars Limited (SRSL), in line with the ongoing sugar milling season in India.

Higher share of joint ventures and associates

  • “Others” segment’s pretax profit at US$36.4m saw positive contributions from shipping and fertiliser businesses as well as gains in investment portfolio (flat y-o-y/ +208% q-o-q), while JVs and associates’ contribution of US$20.9m declined as Europe and Vietnam investments were offset by weaker African and China contributions. (-50% y-o-y, +130% q-o-q).

Balance sheet: Stable gearing ratio

  • Ending cash & cash equivalents were higher at US$4.1bn (4Q18: US$3.4bn) while net debts were relatively stable at US$12.3bn (4Q18: US$13.5bn). This translates into reported net gearing ratio of 0.74x (FY18: 0.84x). Including liquid working capital, net gearing ratio would have been 0.32x (FY18: 0.34x).


Earnings revision:


Stronger tropical oil margin led to higher earnings forecasts for 2019 and 2020

  • Due to the positive performance in 1Q19, we raise our FY19/20 earnings forecast by 5% respectively. This is mainly to account for the CPO refining margin performance as lower-than-expected input cost helped Wilmar’s tropical oil refining margin to perform better than we had previously expected. Our FY19 and FY20 earnings forecasts of US$1.16bn and US$1.2bn respectively are still below consensus.
  • We keep our conservative stance on crushing margin performance in 2Q19, prior the briefing next Wednesday (15 May) albeit management’s positive guidance.


Outlook:


Upbeat amid the challenging environment

  • Wilmar has been performing well since 2018 ahead of its China operation listing and we believe Wilmar should sustain such strong performance ahead due to its upstream-downstream integrated platform which is hedged against the price volatility of commodities.
  • In its latest presentation slides in 1Q19, management did not mention about the progress of its China operation’s listing but we believe the updates shared in 4Q18 showed some urgency on the matter. Hence, we believe management will continue to pursue this matter seriously, both to strengthen its presence in China and to unlock 60% of its profit before tax, which investors only value at a ‘commodity-linked’ PE multiple, not far from its upstream CPO planters’ peers.
  • In addition to the upcoming China listing, another Wilmar's share price catalyst would be the company’s quarterly earnings performance. Management had highlighted in its presentation slides that 2Q19 crushing margins would be stronger, but the company stays cautiously optimistic on the performance for the rest of this year in view of the lingering trade war issue and African swine flu in China.
  • 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 Oils division should also maintain its profitability amid the low CPO price environment. At the current Wilmar's share price, we believe that the market has also priced in concerns over earnings fluctuations in its Tropical Oils as well as Oilseeds & Grains segments, on account of lower commodity prices.


Rating and target price:


Maintain BUY with a higher Target Price of S$3.86

  • Wilmar's share price has risen 13% year to date and we believe it has some legs left to increase further. We raise our DCF-based target price to S$3.86 per share which implies FY19 PE of 15.6x.
  • We believe Wilmar has scope to re-rate further due to its stellar performance delivery amid commodity price volatility. Higher contribution from consumer branded products to its PBT which we estimate to be around 30% in 2019 will minimise earnings fluctuations. We have yet to factor in the China assets’ listing potential as it is still at an early stage.





William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 3.86 UP 3.600



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