Wilmar International - Maybank Kim Eng 2019-10-08: Weaker Crush


Wilmar International - Weaker Crush

China’s new policy may have structural implications

  • Despite a promising recovery in August, Chinese soybean crush margins have fallen back to negative in September. Continued fallout from African Swine Flu (ASF) reducing demand for hog feed is one factor. China allowing imports of Argentinian soybean meal following two-decades of talks is a new factor. Entry of lower cost soymeal may structurally pressure domestic crushers – including Wilmar International.
  • On the other hand, palm oil prices have risen 11% since June while imports to China have shot up 80% in August. Together with better crush margins in August, this bodes well for Wilmar International’s 2H19 outlook vs. the poor performance in 2Q19.
  • Nevertheless, until a clearer resolution of ASF and the extent of China’s Trade War manoeuvring become clearer, we remain cautious. HOLD.

Dark clouds for crush margins?

  • Given a 57% rise in wholesale pork prices since June, as a means of lowering input costs while pivoting away from US soybeans due to the Trade War, China is allowing the imports of Argentinian soybean meal. This is a major policy change from historically supporting domestic crushers.
  • With current Argentinian soymeal spreads significantly cheaper than domestic production, structurally lower crushing margins may become a material risk. The magnitude of the impact will depend on import quotas and when full regulatory clearances are received –the timing of which is unclear so far. Nevertheless, as one of China’s largest soybean crushers, Wilmar International (SGX:F34)’s risks here need to be closely watched.

Sunnier skies for palm oil

  • Potentially lower Chinese crush may limit soybean oil supply paving the way for higher palm oil imports. Wilmar International’s upstream exposure, scale and integrated supply chain make it a key beneficiary of this trend, in our view. We believe this will likely provide some offset for weaker crush margins as well as upside volume/margin surprise on its tropical oils segment in 2H19 and 2020E.

A better 2H19. But maintain HOLD

  • Stronger tropical oils performance and August’s positive crush margins should line Wilmar International up for a better 2H19 vs. the weak 2Q19. But it is not out of the woods yet. Significant uncertainty remains both in terms of macro and operations.
  • Maintain HOLD with our blended DCF (WACC 5.3%, 1% terminal growth) and global peer PE (17.4x FY20E P/E) target price of SGD3.89; 7% upside.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-10-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.890 SAME 3.890