Wilmar International - DBS Research 2019-11-14: They Have Crushed It

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - They Have Crushed It

Wilmar's 3Q19 earnings on track to meet our full year estimate; crushing business rebounded handsomely in 3Q19.
Steady tropical oils as refining margins helped earnings.
Earnings comeback means good dividend prospect. See Wilmar Dividend History.
Maintain BUY with higher Target Price of S$4.35.

Excluding gain recognised on discontinued Brazilian operations, WILMAR INTERNATIONAL (SGX:F34)'s 3Q19 core net profit was US$419.2m (-3% y-o-y; +236% q-o-q) on revenues of US$11.2bn (-2% y-o-y, +14% q-o-q). See Wilmar Announcements.
The stronger earnings q-o-q was primarily driven by a robust recovery in the crushing business, alongside a steady performance from its tropical oil business.
We raised our FY19/20F earnings slightly by 4%/2% to account for 3Q19’s strength, while we are more conservative for next year, as our revised estimates point to earnings growth of 13% y-o-y to US$1.2bn.

Even though 9M19 core earnings accounted for 80% of our FY19F earnings, we raised our FY19F earnings only slightly by 4%. Our FY19 earnings forecast implies that we expect earnings to trend lower q-o-q, as we put into account the likelihood of refining margins compression due to higher palm oil price. Meanwhile we expect Oilseeds and Grains performance to stay steady q-o-q.
We raised FY20F earnings by 2% to US$1.23bn (+13% y-o-y), mainly on expectations that Wilmar can ride along the commodities price dynamics and squeeze out a good trading margin, besides leveraging on its market leader position in consumer branded product segment. Nevertheless, its integrated upstream-downstream platform should help its earnings to grow regardless of the commodity price cycle.
Our FY20F earnings is 9% below consensus – the difference, we believe, is that we are more conservative on the recovery in the crushing business, recovery expectation, albeit the strong comeback in 3Q19. There are still lingering uncertainties over the US-China trade deal and the impact on global commodities especially soybean prices.

Wilmar reported 3Q19 profit rebounded from a weak 2Q19. Excluding the gain recognised from its discontinued Brazilian operations, 3Q19 core net profit of US$419.2m (-3% y-o-y/+236% q-o-q) as revenues came in at US$11.2bn (-2% y-o-y, +14% q-o-q). The increase in earnings q-o-q was primarily driven by strong recovery at its crushing operations, alongside a steady performance from tropical oil business. See Wilmar Announcements.

Profit before tax reached US$301.3m (+1% y-o-y, +509% q-o-q), as crushing margins and volumes improved from the lows in 1H19. Strong volume growth in consumer products buffered the weaker performance in manufacturing as sales volume was affected by the African swine fever.

Profit before tax from Tropical Oils segment was US$193.2m (+24% y-o-y, +8% q-o-q) due to strong performance in the manufacturing and merchandising businesses as sales volumes grew +5% y-o-y/ +6% q-o-q. This was despite lower CPO prices and production yields which were affected by unfavourable weather conditions.

Profit before tax was US$80.1m (+9% y-o-y/ n.m. q-o-q) due to stronger performance from refineries, offset by weaker milling operations due to lower sugar prices. Wilmar continues to drive sales volumes (+31% y-o-y/ +47% q-o-q) across milling, merchandising, refining and consumer products. For 9M19, the segment recorded US$12.4m profit before tax compared to a loss of US$11.5m in 9M18.

The “Others” segment recorded pre-tax loss of US$20.8m (2Q19: +US$6.2m, 3Q18: -US$7.4m) due to mark-to-market losses from its investment portfolio and corporate costs, offset by stronger performances in Shipping and Fertiliser. Joint ventures and associates contributed US$24.7m (-63% y-o-y/ +12% q-o-q) as Wilmar’s investments in Africa, India and Vietnam were weaker.

Cash & cash equivalents as at end-3Q19 was higher at US$2.1bn (2Q19: US$1.8bn) while net debt was slightly lower at US$11.7bn (2Q19: US$12.4bn). This translates into reported net gearing ratio of 0.73x (FY18: 0.84x). Including liquid working capital, net gearing ratio would have been 0.36x (FY18: 0.34x).

We maintain our BUY rating with Target Price slightly higher at S$4.35 per share, which implies 16.3x FY20 PE. See Wilmar Share Price; Wilmar Target Price.
We believe there is scope for the stock to re-rate to +1 standard deviation of its five-year average PE due to the potential listing of its China operations and its intention to go further into the consumer branded products to detach its earnings performance from commodity prices.

As we gather more information on Wilmar’s China operations, we are increasingly convinced that Wilmar’s potential is far greater than market expectations. As the market leader in each segment, Wilmar’s presence makes it difficult for competitors to operate meaningfully in each region. This gives Wilmar a solid footing to further grow its market share and earnings.
Wilmar is also heading towards having a more stable business model and earnings profile with higher contribution from consumer branded products.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-11-14

SGX Stock Analyst Report BUY MAINTAIN BUY 4.350 UP 4.250