Wilmar International - RHB Invest 2019-08-15: The Worst Is Over; Maintain BUY


Wilmar International - The Worst Is Over; Maintain BUY

  • WILMAR INTERNATIONAL LIMITED (SGX:F34)’s 2Q19 results missed our estimates. 2Q19 core PATMI fell 50% y-o-y to SGD177m on weaker profits from oilseeds & grains. 1H19 core profit met only 33%/34% of our/Street full-year estimates.
  • Maintain BUY and TP of SGD4.50, 17% upside plus c.3% yield. 2Q19 results were dragged down by the weak oilseeds & grains segment.
  • Moving forward, management thinks the ASF’s impact on soybean meal demand would take several years to eradicate, but guided for crush margins to improve in 2H19.
  • We believe the worst is over, and expect 2H19 to be better, as it is the peak CPO production season and sugar milling season for Australia.

Weaker-than-expected earnings from oilseeds & grains.

  • Pre-tax earnings for the segment fell to USD59m in 2Q19, down 80% y-o-y and 35% q-o-q. The significant y-o-y decline was due to exceptionally strong crush volumes and margins in 2Q18, when the group had cheaper soybean inventory.
  • The African swine fever outbreak in China also affected demand for soybean meal. While crush margins have improved from 1Q19, pretax profit softened q-o-q, as 1Q was a seasonally stronger quarter for consumer-packed products, which fetch higher margins.

Tropical oils remained strong, with 2Q19 pretax profit growing 15% y-o-y.

  • CPO prices and production remained weak during the quarter. While this is negative for its upstream segment, Wilmar benefitted from lower input costs for manufacturing and merchandising (mid-stream and downstream). Overall pretax margins for the tropical oil segment improved by c.1ppt in 2Q19. We expect this segment to continue delivering decent numbers in 3Q19.

Weak sugar unit’s performance was seasonal.

  • This division’s 2Q19 pre-tax loss grew by 50% to USD69m due to the consolidation of Shree Renuka Sugars. We note that 1Q is the main milling season for Shree Renuka Sugars, while 2H is the main milling season for Wilmar’s Australian subsidiary. As such, we expect the sugar business’ 2H19 performance to improve from here on, and 2Q should remain a seasonally weak quarter moving forward.

JV & associates also recorded lower contributions in 2Q19

  • JV & associates also recorded lower contributions in 2Q19 as its China associates were likely to be affected by the African swine fever as well, while its African business also booked weaker results.

Crushing margins turned positive in June.

  • Earnings from the oilseeds & grains segment have been soft in 1H19 in the absence of exceptional volumes and margins compared to 2018. However, management cited that crush margins have improved from 1Q19 and turned positive in Jun 2019.
  • Management is also more upbeat on 2H19 performance for the segment. However, given the weak 1H19, and ongoing impact from the African swine fever (ASF), we cut our FY19F-21F earnings by 5-8%.

More clarity on China IPO valuation.

  • According to COO, Mr Pua Sek Guan, China IPOs usually take the previous fiscal year as the base year for valuation. As a result, if the China Securities Regulatory Commission (CSRC) approves the IPO of Yihai Kerry Arawana Holdings (YKA) by this year, it would be valued based on its FY18 recurring PATMI, but if the approval drags to next year, the valuation would be based on YKA’s FY19 earnings.

China IPO would continue to support share price.

  • During the briefing, management remained firm and optimistic on the China IPO. This is despite the weak set of results from the oilseeds & grains segment, as YKA’s share price is likely to perform well post-listing due to its large market cap, higher peer average P/E of 31x, and the latter’s strong consumer product brand in China.
  • We now value the oilseeds & grains segment based on 20x blended FY18-19F P/E, and coincidentally derive the same Target Price of SGD4.50, but caveat downside risk to valuation, if China market sentiment wanes.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-08-15
SGX Stock Analyst Report BUY MAINTAIN BUY 4.500 SAME 4.500