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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 17 May 2019, 2:55 PM

 

Wilmar International - Superb 3Q18 Performance; Back to Norm in 4Q18

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  • We raise our 2018 net profit forecast by 11% after factoring in the strong 3Q18 performance. Based on the revised earnings, net profit is likely to come in lower y-o-y in 4Q18 (4Q17: core net profit of US$373.9m) due mainly to a lower sugar contribution and no investment gains.
  • Tropical oil is expected to do well in 4Q18 as refiners are having better bargaining power in a palm oil oversupply situation.
  • Maintain BUY. Target price: S$3.90.

What’s New

Upward earnings adjustment for 2018 mainly to factor in 3Q18 performance.

  • We raise our 2018 net profit forecast by 11% to factor in the strong 3Q18 earnings. Based on the revised earnings, net profit is likely to come in lower y-o-y in 4Q18 (4Q17: core net profit of US373.9m) due mainly to lower sugar contribution and no investment gains.

We Are Conservative on 4Q18 Profit Expectation for the Following Reasons

Demand for soymeal for 4Q18 could be weaker.

  • Soymeal demand for 4Q18 could be weaker because:
    1. buyers have stocked up soymeal in 3Q18 in anticipation of a potential shortage in 4Q18 when the bulk of soybean supply is coming from the US, and China is buying from them currently; and
    2. the population of hogs has fallen due to the Africa virus that has hit the swine industry in China now. We maintain sales volume for this division to grow at mid-single-digit q-o-q but lower y-o-y with weaker margins as well.

Sugar division breaking even.

  • The strong 3Q18 performance was also partly due to high sales volume, supported by unsold volume from 2017 sugar production and some of 2018 production. The 2017 production has been fully sold and delivered in 3Q18 and 4Q18 sales volume would solely be from 2018 sugar production. Wilmar may use a similar strategy as in 2017, ie to commit the sales of sugar produce in the season to the next year. Thus, it could see a big q-o-q decline in sales volume for its milling operation.
  • The sugar merchandising, refining & consumer products segment could see higher sales volume but margins may not be good given low sugar prices.

Lower contribution from others.

  • The strong 3Q18 performance was also partly due to high sales volume, supported by unsold volume from 2017 sugar production and some of 2018 production. The 2017 production has been fully sold and delivered in 3Q18 and 4Q18 sales volume would solely be from 2018 sugar production. Wilmar may use a similar strategy as in 2017, ie to commit the sales of sugar produce in the season to the next year. Thus, it could see a big q-o-q decline in sales volume for its milling operation.
  • The sugar merchandising, refining & consumer products segment could see higher sales volume but margins may not be good given low sugar prices.

 

Lower contribution from others.

  • The Others segment reported very good PBT contribution in 2017 (4Q17: 15.9%, 2017: 15%), partly due to gains from investment securities which may not repeat in 4Q18.
  • For 9M18, contribution from this segment dropped 98% y-o-y due to weaker performance from the fertiliser business and lower investment income.

 

Stock Impact

Tropical oil division to perform well on higher sales volume and steady margins.

  • This division is benefitting from the oversupply of palm oil currently and giving refiners better pricing power. In a few regions in Malaysia and Indonesia, CPO producers are trying to sell more by giving a discount to market prices as they are running out of storage capacity. This is due to the high production since August in both the countries, relatively weak demand and logistics issues in Indonesia.

China IPO still on track.

  • Management said the listing of its China operation in the A- share market is still on track for a possible listing in 2H18.

Earnings Revision / Risk

  • We raise 2018 net profit forecast by 11% to factor in the good 3Q18 net profit. We maintain 2019-20 earnings forecasts. We now forecast EPS of 19.4 US cents, 20.0 US cents and 22.5 US cents for 2018-20 respectively.

Valuation / Recommendation

Maintain BUY and target price of S$3.90.

  • This translates into 13.7x 2019F blended PE, which is slightly higher than Wilmar’s 5-year mean (1-year forward PE of 13.2x). We ascribe 20x 2019F PE for the oilseeds & grains division, 15x for the tropical oils division, 8x for the sugar division and 10x for the other businesses.

Share Price Catalyst

Potential listing of China operations.

  • As more details of its China operations are made available in the listing process, investors might see greater value in Wilmar. IPO shares are likely to be valued at 23x PE vs 20x PE applied to our current SOTP valuation. If we peg the China operations at 23x PE, this will add about S$0.30/share to our target price.

Value-enhancement M&A.

  • Depressed soft commodity prices are forcing smaller and inefficient players to sell assets and exit the industry. This will be an opportunity for larger and efficient players to consolidate their market positioning by purchasing assets at reasonable prices and would enhance value of the acquirers.

Source: UOB Kay Hian Research - 16 Nov 2018

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