Wilmar International 3Q19 Results Preview - UOB Kay Hian 2019-10-29: Tropical Oils Still The Star; Oilseeds & Grains Margin To Improve Q-o-q

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

Wilmar International 3Q19 Results Preview - Tropical Oils Still The Star; Oilseeds & Grains Margin To Improve Q-o-q

  • We are expecting Wilmar International's 3Q19 net profit of US$390m-410m, vs 3Q18’s US$435m and 2Q19’s US$177m.
  • 3Q is seasonally the best earnings quarter, driven by festive demand and the start of sugar crushing season. For 3Q19, tropical oils will continue to be the star performer, driven by resilient margins, while oilseeds & grains is expected to see better earnings q-o-q on the back of positive soybean crushing margins and higher consumer packs sales.
  • Maintain BUY. Target price: S$4.40.



WHAT’S NEW


Seasonally strong quarter.


Lower profit y-o-y not a concern.

  • As mentioned, 3Q19 net profit is likely to be lower than 3Q18's US$435m. This is not a concern as 3Q18 earnings were driven by better crushing margins due to the market distortion from the US-China trade war and also good palm refining margins as CPO price was down significantly due to strong production.
  • Meanwhile, palm oil downstream margin is expected to sustain in 2019, and crushing margin is expected to be lower y-o-y.

Oilseeds & grains earnings to come from better consumer products and recovery of soybean crushing margins.

  • We are expecting higher sales volume from consumer products on festive demand (Mid-Autumn festival and Golden Week holiday). Soybean crushing margin is expected to have recovered in 3Q19 and this will enhance the division’s margins. This is in line with industry trend which shows the uptrend in margins since end-May 19.

Unfavourable weather tempered 2019 sugar production.

  • 3Q19 should see positive contributions from the sugar division as the sugarcane crushing season has started in Australia. However, we are expecting lower contribution vs 3Q18 as we are expecting lower crushing volume since the wet weather affected sugarcane crops’ growth and sugar yield. The Australia Sugar Milling Council is estimating Australia’s 2019 sugarcane crop to be 3% lower than 2018’s.


STOCK IMPACT


Tropical oils division remains as the star performer.

  • The good profit margin for palm downstream operation since 2H18 is likely to sustain into 3Q19 as CPO price has remained low and continues to favour downstream players.
  • 2019 has been a very good year for downstream producers with low feedstock prices, good feedstock supplies and good demand that will sustain the processed products pricing as well. An impact of the recent surge in CPO, if any, will likely be in 2020.

4Q19 could be another strong quarter.

  • If Wilmar International is able to meet our expectation, we may see consensus upgrade as 4Q19 could potentially be another good earnings quarter with earnings possibly similar to 3Q19. This is because 2020 Chinese New Year (CNY) will take place in end-Jan 20, which means pre-CNY demand will come in 4Q19 instead of the usual 1Q.


EARNINGS REVISION/RISK

  • No change to earnings estimates. We forecast core net profits of US$1,205m, US$1,348m and US$1,443m for 2019-21 respectively.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$4.40, which reflects a blended 23x 2019F PE for China operations and blended 11x PE for non-China operations. See Wilmar Share Price; Wilmar Target Price.
  • Accumulate at current price to ride on the better 2H19 earnings and the unlocking of value through the listing of YKA on ChiNext board of the Shenzhen Stock Exchange. This would support share price in the near term, and we expect further re-rating once the IPO is completed.


SHARE PRICE CATALYST


Share price re-rating from the listing of YKA.

  • With its strong market positioning and branding in China, we expect Yihai Kerry Arawana’s (YKA) share price to perform well upon listing. This could lift trading sentiment on Wilmar International as well. Post listing of YKA, we expect Wilmar International to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.
  • Our current SOTP-valuation is based on 2019F earnings, ie it is beyond the fear that any delay to the IPO may not allow the IPO to be priced at 2018 earnings.





Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 4.400 SAME 4.400



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