Wilmar International - Maybank Kim Eng 2019-11-20: Making Headway


Wilmar International - Making Headway

Long term is green; short-term focus on margins

  • WILMAR INTERNATIONAL LIMITED (SGX:F34)’s recent ESG Corporate Day showcased its focus on improving standards in environmental protection, sourcing traceability, human rights and labour relations. This strategy should yield Wilmar long-term competitive advantages. That said, much more investments will need to be made to stay ahead in this rapidly evolving space, we believe. See Wilmar Announcements; Wilmar Latest News.
  • While Wilmar seems to have turned around from its 2Q19 rut from weak soybean-crushing margins, the lingering impact of ASF may reduce earnings visibility. A weaker sugar outlook also does not help.
  • Although we raise EPS by 4-8% and our DCF and P/E blended Target Price to SGD4.21 after rollover, maintain HOLD.

ESG: work in progress in the right direction

  • As one of the world’s largest suppliers of edible oils – especially palm oil – Wilmar has had its fair share of environmental activism and investigations.
  • With many consumer brands as its customers and marked shifts in buying behaviour towards ethically-sourced, low-environmental-impact and traceable food sources, the group has had to evolve its sourcing practices and community engagement rapidly.
  • According to management, while this demand shift was mostly led by developed markets in the past, changing customer behaviour towards sustainability is increasingly evident in developing markets, especially India and China, which are among the world’s largest palm-oil consumers.
  • Wilmar hosted an ESG Corporate Day on 19 Nov 2019 in Singapore to provide insights into its sustainability journey. Highlights were:
    • Since the launch of Wilmar’s No Deforestation, No Peat, No Exploitation (NDPE) policy in 2013, it has been working with stakeholders, NGOs and consultants to keep its frameworks updated and relevant to rapidly changing realities on the ground and to stay ahead of customer & government policy requirements
    • All suppliers which do not have their own published NDPE policies have to provide written confirmation of Wilmar’s NDPE policy. So far, over 70% of its suppliers have met their NDPE commitments
    • The group is strictly enforcing a ‘Suspend then Engage’ approach on suppliers where there is proof of deforestation and peatland development. Re-engagement of these suspended suppliers is based on a time-bound remedial approach where the onus is on the suppliers to make material changes to their practices. So far, 17 suppliers have been suspended, accounting for around 1.02m ha of oil-palm plantations
    • Nearly 15m ha of supplier plantations are actively monitored by Wilmar’s Supplier Group Compliance Program, supported by NGO Aidenvironment. This group provides active monitoring and real-time data with the help of satellite imagery. All new suppliers have to provide detailed group-level land maps to aid monitoring
    • Site visits to supplier mills are supported by the NIMBLY App, which allows for real-time reporting and verification. This has reduced the time taken for reporting and verification from months to almost instantaneous while cutting the headcount needed for such work
    • Close to 80% of Wilmar’s planted area is RSPO-certified. RSPO is the industry sustainability standards organisation. According to management, 100% of its plantations are sustainable with the difference being pending HGU titleling. Indonesia typically allows oil palms to be planted without the HGU title as long as local land permits are in order.
    • Wilmar is working with Verite – an NGO specialising in labour rights – to develop systems to manage HR risks across its extended supply chain as well as to improve labour relations, quality of life for its workforce and community engagement
    • We believe a significant body of work still needs to be done in ESG to fully meet the expectations of Wilmar’s various stakeholders. However, the group’s proactive addressing of these issues should give it a competitive advantage in the long term as smaller players struggle to catch up.

Operational improvements: but uncertainties remain

  • Wilmar's 3Q19 core profits improved 3x q-o-q as Chinese soybean-crushing margins turned around. However, the underlying weakness behind its disappointing 2Q19 – demand destruction related to African Swine Flu (ASF) – remains at large.
  • Improved refining margins in 3Q19 turned around its sugar operations, but excess global supply could cause prices to stay weak. The above combo continues to limit its near-term earnings visibility.

Raise Target Price to SGD4.21 but maintain HOLD

  • Better delivery in tropical oils, consumer products and sugar margins prompts us to raise 2019-21E EPS by 4-8%. Our blended DCF (WACC 5.3%, 1% terminal growth) – rolled forward to 2020E - and global peer P/E (raised to 18.5x from 17.4x to reflect the latest prices). See Wilmar Share Price; Wilmar Target Price.
  • Maintain HOLD given a lack of near-term catalysts.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-11-20
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.21 UP 3.890