Wilmar International - RHB Invest 2020-11-02: Tropical Oils To Benefit From Diversification; BUY


Wilmar International - Tropical Oils To Benefit From Diversification; BUY

  • We raise our target price, as the outlook for Wilmar (SGX:F34)’s tropical oils segment could strengthen on higher CPO prices and Indonesia’s new export levy structure.
  • As the CPO price has been volatile of late, we revise our FY21 assumption to MYR2,650/tonne to reflect the anticipated slight y-o-y increase. As such, our FY21F earnings are now higher by 6%.
  • We also project a special dividend of S$0.12 from Wilmar post listing of Yihai Kerry, which raises our dividend yield to 6%.
  • BUY Wilmar, new S$5.60 target price from S$5.45, 35% upside with 6% FY20F yield.

Geographical diversification allows Wilmar to take advantage of rising CPO prices and Indonesia’s new export levy structure.

  • CPO prices have been very volatile of late, racing past the MYR3,000/tonne mark, before falling back below. Our in-house CPO price assumptions are raised to MYR2,600, MYR2,650 and MYR2,600 per tonne for FY20-22F (from MYR2,400 and MYR2,500 per tonne for FY20F and FY21F). However, we note that Indonesian planters would not be able to enjoy as high a price due to the export duty structure.
  • Wilmar, as one of the largest oil palm plantation owners in Malaysia and Indonesia (total ex-Africa: 210,877 ha) and the largest palm oil processor in the two countries (Malaysia and Indonesia: 42 refineries), should benefit from the current circumstances as it could shift more of its downstream operations to Indonesia to capitalise on the lower domestic CPO cost. Meanwhile, its Malaysia plantations continue to gain from higher CPO prices.

Soybean prices may see some correction.

  • We expect soybean crush margins to taper down in 4Q20, in view of rising soybean prices. We note that soybean prices have risen by 20% in the last two months, largely driven by La Niña conditions. That said, our base case assumption is that soybean prices should see some correction, which would mean margins could pick up again in 2021. While La Niña is underway, causing some damage to crops in recent weeks, increased output in the US (+19-21% y-o-y) and higher planting acreage in Brazil (+3% y-o-y) could offset some of the negative impact.
  • In addition, China has been stocking up on soybean lately. Higher national reserves in China could help to cushion tightening soybean supplies, if the La Niña impact worsens. In addition, rising demand for soybean meal arising from hog inventory replenishment in China could also allow crushers like Wilmar to pass on rising raw material prices to end-buyers. The key downside risk is a worsening La Niña, which would affect the planting and flowering season in South America more than what we expected.

Maintain BUY, on the improving outlook for Wilmar’s tropical oils segment.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 5.60 UP 5.450