SG: Wilmar International (WIL SP) Materials

Price Target: $2.60 | SELL | Downside 23%

Way below expectations. 2Q12 results were very much below expectations. Excluding non-operating items, recurring net profit of US$172m was still down 55% yoy. With recurring net profit for 1H12 hitting just US$378m against full-year consensus of US$1.44b, we see significant downwards earnings revisions.

Losses at Oilseeds & Grains. Management cited "poor timing of beans purchase" following the 1Q12 losses in this division, but not this time round. This 2nd straight quarterly loss confirms our earlier argument that soybean crushing over-capacity in China will continue to hurt margins and the market has been too optimistic to expect a turnaround. To compound matters, soybean prices have continued to soar following the US droughts and Wilmar will find it difficult to pass on costs in China. We expect losses for the full-year in this division.

Flat CPO prices another factor. Even while soybean prices rallied, CPO prices have remained flat this year, which was another negative factor for Wilmar. 2Q12 PBT for its Plantations & Palm Oil Mills division declined 45% yoy to US$79m on lower margins, as well lower production (-9% yoy) from the after-effects of 2010-2011 dry weather in its plantations.

Wet weather delay in Australia for Sugar. While milling season in Australia normally commences in May/ June, the wet weather this year has delayed crushing season, which meant there was no profit contribution from sugar milling. This was perhaps understandable, but does not explain the 56% yoy profit decline at its Sugar Merchandising and Processing segment.

Book value may be the better support. We cut our earnings estimate by 10%-18%. We continue to see headwinds for Wilmar’s businesses, especially in Oilseeds & Grains. With earnings visibility declining by the quarter, we think book value rather than earnings may be a better level of support for share price. We now peg our TP of $2.60 to 1x P/B. While this may sound draconian, we note that the current US$2.09/ share consist of US$0.69 in intangibles, majority related to goodwill from Kuok Group merger in 200. Maintain SELL.

Source: Maybank Kim Eng Research - 15 August 2012