Wilmar International - OCBC Investment 2019-08-16: Tapping The Opportunities Of Rising Food Demand


Wilmar International - Tapping The Opportunities Of Rising Food Demand

  • Crush margin expected to recover in 2H19.
  • Food consumption remains strong.
  • Continued downstream expansion.

African swine fever dragged crush margin

  • Wilmar International (SGX:F34)’s 2QFY19 overall sales volume grew 3.9% while revenue fell 9% y-o-y US$9.8b due to lower commodity prices. Net profit decreased by 52% to US$150.9m, attributable to
    1. larger-than-expected impact of African swine fever outbreak on soybean meal demand which dragged the crush margin;
    2. lower contributions from the Associates in China;
    3. the consolidation of Shree Renuka Sugars.
  • For 1HFY19, Wilmar International's revenue was down 8% y-o-y to US$20.2b while net profit fell 22% to US$407.9m. The latter formed 33% and 34% of ours and street’s full-year forecasts, respectively.
  • An interim DPS of S$0.03 was declared, as compared with S$0.035 in 2QFY18. See Wilmar International's dividend history.

Strong performance in Tropical Oils and Consumer Products

  • Tropical Oils continued to outperform in 2QFY19, with profit before tax (PBT) up 15% y-o-y to US$177.3m, on the back of stronger performance from the Manufacturing & Merchandising business which recorded a 10% y-o-y increase in sales volumes. The growth was partially offset by weaker plantation contributions due to lower crude palm oil prices and production yields (-10.3% y-o-y).
  • Separately, 2QFY19 PBT for Oilseeds and Grains segment (O&G) fell 80% y-o-y to US$59.2m, due to the absence of strong crush volume and margins that were enjoyed in 2QFY18. However, management noted that crush margin turned positive in June and is expected to further improve in 2HFY19.
  • Consumer Products remained the key growth driver for O&G segment, with sales volume up 4% y-o-y. Despite the softer demand in soybean meal which continued to be weighed by African swine fever, overall sales volume for O&G rose 2% y-o-y to 8.9m MT in 2QFY19, underscoring Wilmar International’s diversification of products and strong food consumption demand in China.

YKA is expected to be listed in FY20

  • Wilmar International submitted its Yihan Kerry Arawana (YKA) IPO application in early July and expects the approval process to take approximately 6-12 months. We expect the earliest listing date likely to be in 1QFY20 and anticipate a special dividend post IPO.
  • We like Wilmar International’s diversification of products and continued efforts to expand its downstream business (e.g in Rice, Oleochemicals, Flour), which could help smooth the volatility of earnings, especially as compared with pure Plantation companies.
  • Management expects Wilmar International to benefit from the large population size and growing food consumption demand in Asian and African countries, and sees increasing sales and profitability from investments in key markets such as India, Vietnam and Africa.
  • We fine tune our earnings forecast to account for 2QFY19 weakness but expect 2HFY19 to recover. Maintain BUY with a fair value estimate of S$4.26.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-08-16
SGX Stock Analyst Report BUY MAINTAIN BUY 4.260 SAME 4.260