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

 

Wilmar International - Look Beyound 1Q19; Wilmar Is Not Just a Soybean Crusher or Palm Player

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  • Wilmar’s share price decline of 3.8% after its results announcement is not justified.
  • 2018 reported the highest EBITDA since WILMAR INTERNATIONAL LIMITED (SGX:F34) was listed, led by good performances from the oilseeds & grains division and associates.
  • 2019 could see some pressure from soybean crushing operations in 1Q, but a recovery in crushing margins is expected to come in 2Q and support should come from tropical oils, rice & flour as well as the consumer pack segment.
  • Maintain BUY. Target price: S$3.90.

What’s New

Wilmar sell-off is not justified.

  • Wilmar’s share price dropped 3.8% after its results announcement which highlighted that 1Q19 earnings could be affected by bad crushing margins. We deem the sell-off is overdone and investors should look beyond 1Q.
  • 2019 could see some pressure from soybean crushing operations in 1Q, but a recovery in crushing margins is expected to come in 2Q and support should come from the tropical oils, rice & flour and consumer pack segments.

Do not underestimate contributions from consumer packs, rice and flour.

  • The oilseeds and grains division is made up of soybean crushing, flour and rice milling and consumer packs. Impact from weak soybean crushing margins no longer has a significant impact on Wilmar’s earnings like it did 5 to 6 years ago.
  • Willmar’s investments into rice, flour and consumer packs are now bearing fruits. Contribution from consumer packs is now approximately at 25-30% of group PBT vs about 17% in 2014 before contributions from this division were consolidated under oilseeds and grains.
  • The sales volume for rice and flour has increased as well; we estimate this could contribute at least one-third of total manufacturing sales volume under oilseeds & grains. Thus, the weaker crushing margins in 1Q could be offset by higher sales volumes from consumer packs in preparation for the Chinese New Year in early Feb 19.

China listing progress as scheduled with potential market cap of US$14.1b to US$16.5b.

  • Wilmar has converted its China holding company into a joint-stock company for the separate listing in China. Investment banks have been appointed and the due diligence process has already started. The submission for the listing is likely to happen in 3Q19 and the earliest the listing could take place is late-4Q19. Management should leverage on its strong 2018 performance in China to complete the listing.
  • For 2018, China operations contributed approximately 70% of group PBT. Assuming 60% of earnings were recurring earnings, the potential market cap at 20x to 23x 2018 PE would translate into market capitalisation of US$14.1b to US$16.5b vs its current market cap of US$15.2b.

Tock Impact

Wilmar outperformed peers in 2018.

  • 2018 was a challenging year for soft commodity players. Prices weakened in 2018 and the US-China Trade war led to high price volatility.
  • 2018 saw earnings from most agricultural companies report weaker y-o-y earnings. But Wilmar outperformed its peers in the palm industry as well as major global agricultural processors and trading companies with positive core net profit and margin growth vs contractions for peers. Especially with regard to the sugar business, Wilmar showed significant strength, delivering positive earnings while peers in this industry were exiting due to losses (eg Bunge and Olam International).

Oilseeds and grains: Weak crushing margins in 1Q but to recover in 2Q19.

  • The weak 1Q soybean crushing margins were mainly due to the arrival of expensive soybean supply from Brazil. Recall that Brazil’s soybean prices had swelled to a large premium against US soybeans after China slapped steep tariffs on shipments from the US in Jul 18. But that premium narrowed after China agreed to purchase soybean from US again on 1 Dec 18. Margins would improve in 2Q19 after high-priced soybean supply has undergone crushing (likely to be fully crushed by Mar 19).
  • Despite industry utilisation having dropped from close to 60% to below 50%, Wilmar’s utilisation is still hovering at around 70% to 75%. As we expect better contributions from consumer packs in 1Q (festive demand), oilseeds and grains’ PBT for 1Q is likely to remain positive.
  • We are expecting a lower PBT (2019F: -25.6% y-o-y) from oilseeds and grains after factoring in lower soybean crushing volumes (due to weaker soymeal demand) and PBT margins.

Tropical oils: Confident about delivering a good performance.

  • For 2019, management remains confident that this division will deliver a good performance despite higher feedstock prices. We reckon this could happen if Wilmar managed to secure its palm-based feedstock for 2019 when prices were low from Nov 18 to mid-Dec 18. We are not ruling out this possibility as this is a hedging strategy used by most commodities-based companies.
  • 2018 saw a 37% jump in PBT, attributable to higher PBT margins due to lower feedstock prices.

Sugar guidance is unexciting,

  • .. but sugar prices have recovered from its low of 10 US cents/lb to around 13 US cents/lb currently and this should be positive to Wilmar.
  • Shree Renuka Sugars (SRSL), which was incorporated as a subsidiary (58% stake) in Oct 18 already turned EBITDA positive in 4Q18 as the Indian sugar market is receiving more support from the government (in terms of floor price increases, export subsidies and higher prices for ethanol).

Earnings Revision / Risk

Maintain earnings forecasts.

  • We maintain our net profit forecasts of US$1.24b and US$1.43b for 2019 and 2020 respectively.
  • We also introduce our net profit forecast of US$1.51b for 2021.

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 five-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 other businesses.

Share Price Catalyst

  • Potential listing of China operations.
  • Value-enhancing M&As.

Source: UOB Kay Hian Research - 25 Feb 2019

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