Wilmar International - RHB Invest 2020-03-24: Lower CPO Prices; Still BUY


Wilmar International - Lower CPO Prices; Still BUY

  • Maintain BUY with a new SGD4.30 Target Price from SGD4.77, 39% upside and 4% yield.
  • In view of the COVID-19 pandemic, we expect CPO demand to weaken from the EU, US, and China. Indonesia’s biodiesel demand may also come off. Additionally, the negative sentiment surrounding commodities and the general economic environment will mean that CPO prices may take some time to recover, in our view. This lowers our earnings forecast and valuation targets.
  • The China IPO remains the key for Wilmar International's share price recovery.

Our in-house assumption currently is for COVID-19 to be under control within 1H20.

  • This assumes a 10% decline in demand from the EU, US, and China, as well as a 2.1m tonnes decline in biodiesel demand in Indonesia – a total decline in CPO demand of 3.8m tonnes. With this, we estimate an increase in CPO stock/usage ratios to 20.1% from 18.6%.
  • Based on historical data, CPO prices ranged between MYR2,200 and MYR2,400/tonne when stock/usage ratios were at these levels in 2011 and 2018. Our in-house CPO forecasts now drops to MYR2,400/tonne from MYR2,600/tonne for 2020 and remains unchanged at MYR2,500/tonne for 2021-2022.

Change in forecasts.

  • We cut our Wilmar (SGX:F34)'s FY20F-22F earnings by 8%, 6%, and 5% on lower CPO price assumptions, decline in manufacturing and merchandising sales volumes, and new FX assumptions.
  • We also lower our SOP-derived Target Price to SGD4.30 while cutting our valuation target for the plantation unit to 12x FY20F P/E from 16x – in line with the downgrading of the plantation sector.
  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
  • Our DCF valuation for the palm manufacturing and merchandising segment also declined due to lower sales volumes. We also apply lower valuation targets for the sugar segment, as well as JV and associates, to factor in the negative sentiment in the macroeconomic environment.
  • We kept the valuation of the oilseeds & grains segment, as the China listing is still on the plate. We note that the valuation of large-cap Chinese consumer names have not deteriorated so far. Therefore, the IPO should still be a key catalyst to Wilmar International's share price in the near term.

Key risk.

  • The worst case scenario is still a possibility if COVID-19 is not arrested by end 2020. The China IPO may then be called off if the financial market there deteriorates significantly.
  • Meanwhile, China’s demand for palm oil, as well as soybean oil and meal may also be affected if the COVID-19 pandemic is prolonged.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-24
SGX Stock Analyst Report BUY MAINTAIN BUY 4.30 DOWN 4.770