Wilmar International - DBS Research 2019-07-15: Coping Well With Low Commodity Prices


Wilmar International - Coping Well With Low Commodity Prices

  • Looking for steady profitability at lower commodity price assumptions.
  • Strong tropical oil margin likely to sustain beyond 1Q19.
  • China operation listing may drive Wilmar’s share price along with 2Q19 earnings performance.
  • Maintain BUY with a higher Target Price of S$4.30.

Stay profitable in the current environment.

  • Lower edible oil price assumption has neutral impact on Wilmar International (SGX:F34) at this moment as we believe the company’s upstream-downstream platform would enable it to stay profitable in the current challenging environment. The increased revenue and earnings contribution from its consumer branded products would also provide support to Wilmar International’s profitability performance, and a catalyst for Wilmar’s share price re-rating.

Where we differ: Share price rally still has legs.

  • Wilmar’s share price performance year-to-date was boosted following its release of good earnings, and the stock would likely continue to perform well if the strong earnings trend is maintained. We believe Wilmar is able to withstand the commodities price pressure arising from trade war tensions, given its ability to maximise its crushing capacity and efficiencies.
  • Moreover, Wilmar’s downstream Tropical Oils division should also be able to maintain its sound strong earnings trend amid the low CPO price environment.

Catalyst from listing of China operations.

  • Possible IPO plans (A- share listing) for its China operations could further catalyse Wilmar’s share price.


  • We switch our valuation methodology to sum of parts (SOTP) and derive a higher target price of S$4.30, which implies FY20F PE of 16.2x.

WHAT’S NEW - Coping well with low commodity prices

Where we are right now: Market is looking for positive profitability performance and upcoming listing of China operations

  • Wilmar’s share price has performed well year to date as the market is gradually convinced that Wilmar’s performance is able to withstand headwinds arising from the trade war. The market also expects the China A-shares listing to help Wilmar’s valuation, which currently is still largely in line with its commodity peers.
  • Higher valuation multiple cab be justified with higher contribution from its consumer branded products division. We estimated that more than 20% of its profit before tax is already derived from the consumer branded products in 2018.

Earnings forecast: Assume neutral impact on lower commodity price assumptions

  • We believe Wilmar’s business model is set to place a profitability cushion amid current low commodity prices. The company’s strong tropical oils business division should be able to sustain its profitability this year. The contribution would mainly be from its refining/consumer branded cooking oil segment, as palm oil price has limited room to recover due to stagnated soybean price following the correction in 2Q19.
  • Meanwhile, we expect the soy crushing business margin in China to still be affected by the current African swine flu epidemic which hinders volume expansion, although the pressure on margins would be partially offset by lower input cost.
  • We keep our earnings pretty much unchanged for FY19 and FY20 as we conservatively assume that lower commodity prices have a neutral impact on Wilmar’s profitability. We prefer to wait until 2Q19 earnings announcement to reaffirm that low commodity prices could truly benefit Wilmar’s profitability; and, could present an upside risks to our forecasts.

Rating and target price: Higher Target Price of S$4.30 and maintain our BUY rating.

  • In anticipation of the China operations listing, we switch our valuation methodology to sum of the parts (SOTP), which results in a higher target price of S$4.30, as compared with the S$3.86 figure derived from DCF.
  • We employ a PE multiple for each business division in our valuation for Wilmar. We believe our multiples are fair, such as 11x for sugar and CPO and 17x for its oilseeds and grains business, considering its size in China and emerging branded consumer product division.
  • We believe Wilmar’s valuation is undemanding considering its size and scalability which helps the company to achieve optimum profitability performance. Its comprehensive footprints and supply chain also result in lean operations and cost savings.
  • Going forward, higher contribution from branded consumer products should also provide scope for re-rating from the current ‘commodity-linked’ valuation multiple. Wilmar’s shift towards becoming a manufacturer of branded consumer products is expected to provide a stronger footing to its earnings performance mainly on better pricing power.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-07-15
SGX Stock Analyst Report BUY MAINTAIN BUY 4.30 UP 3.860