Wilmar International - RHB Invest 2019-09-30: China IPO Still The Key Catalyst; Maintain BUY


Wilmar International - China IPO Still The Key Catalyst; Maintain BUY

  • Reiterate BUY, higher Target Price of SGD4.75 from SGD4.50, 27% upside and c.3% dividend yield. This is due to our sector upgrade to OVERWEIGHT, as we expect CPO prices to rerate upwards in 4Q19 and continue their upward trend in 1H20.
  • CPO prices are the leading indicator for plantation P/E valuations. Being one of the largest oil palm owners, we expect WILMAR INTERNATIONAL LIMITED (SGX:F34)’s upstream business to benefit from rising CPO prices. We now value its plantations at a higher P/E.

We expect upstream planters to benefit more

  • We expect upstream planters to benefit more from the rise in CPO prices than Wilmar (SGX:F34), which is exposed to the entire supply chain of palm oil. As such, we have switched our Singapore plantation sector Top Pick to First Resources. Wilmar remains one of our Singapore Top Picks, as the upcoming China IPO remains a key positive catalyst for Wilmar's share price.
  • We leave our CPO price assumptions unchanged at MYR2,200/tonne for 2019 and MYR2,400/tonne for 2020.
  • The main premises for our upgrade are:
    1. Trade war is still on, with import duties being levied on US soybeans;
    2. A CPO production slowdown is imminent in 2020, while inventories should normalise by 1Q20;
    3. Demand should remain strong from China, due to the continuing African swine flu epidemic in the country;
    4. The B30 biodiesel mandate in Indonesia will mop up any excess supply from the market in 2020;
    5. Crude oil prices will remain at relatively high levels, resulting in a positive CPO-gasoil price gap;
    6. Weather conditions remain normal.

Trade war continues to have far-reaching effects.

  • The trade war continues to have far-reaching effects on the sector, not only on soybean demand and supply dynamics, but also on crude oil prices and FX volatilities. This, combined with the improving supply-demand dynamics of the CPO and eight vegetable oil complex, should lead to improved CPO prices in 2020.

Positioned for CPO price recovery.

  • Although Wilmar is much bigger in the processing space, we note that management has highlighted its expectation of a CPO price recovery in the previous two briefings. This leads us to believe the group has positioned itself to capture higher margins in the upstream segment, while keeping low-cost inventories for its mid-stream and downstream business for subsequent quarters when CPO prices go up.

Higher SOP-derived Target Price of SGD4.75.

  • We apply a higher P/E of 16x to Wilmar’s upstream plantation earnings in FY20F (10x previously).
  • We expect Wilmar's share price to still be largely driven by the rerating of its oilseeds & grains business upon its China listing.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-09-30
SGX Stock Analyst Report BUY MAINTAIN BUY 4.75 UP 4.500