Last Wednesday, Wilmar reported 1Q results which saw net income rising 23.3% as compared to a year ago. Investors rejoiced and the shares jumped 2.1% on the day earnings were released. The very same day, Macquarie Equities Research (MER) published a research report over Wilmar and some excerpts are seen below.

MER continues to see Wilmar as growth challenged, due to rising competition in its core midstream businesses. With limited upside to MER’s target and few upside catalysts ahead, MER stays Neutral with a 12-month price target of $3.50. 

Impact
Drivers of the good 1Q13 result will be hard to sustain. 1Q13 net income came in 10% ahead of MER’s estimate, driven by strong margins in the Palm & Laurics (CPO refining) and Sugar divisions. Oilseeds & Grains (China soybean crushing) also turned in a decent, albeit expected, profit.

The Palm & Laurics unit faces rising competition as capacity is expanding to take advantage of the favourable Indonesian export tax regime. This impact could start being felt as early as 2Q13. Palm & Laurics is Wilmar’s largest profit centre (40-45% of profit before tax (PBT)).

The strong Sugar margins were driven in part by trading gains, which are not necessarily sustainable. This division delivers ~10% of PBT.

Soybean crushing margins have already come off again in 2Q13. 1Q13’s US$10/ton margin was bolstered by low soybean availability due to logistical issues in Brazil. This favoured large players like Wilmar, who captured an above average share of imports and capitalized on high industry margins in a tight market. But soybean supply is improving from May, and this is already impacting margins negatively, according to Wilmar. This business accounts for 9-12% of PBT but its performance can swing significantly.

CPO upstream buffeted by low prices. This division accounts for a quarter of PBT normally, but only ~20% in a low price environment like today. MER expects weak CPO prices for the rest of the year before rebounding in 2014.

MER expects a sequential decline in net income 2Q13 for the reasons outlined above. MER also sees downside risk to consensus’ call for a 10% earnings per share (EPS) compounded annual growth rate (CAGR) over 2013-15E (MER’s estimate calls for 2%).

Action and recommendation
With a 2% EPS CAGR and 10% returns on equity (ROE) for 2013-15E, MER thinks the 12x PE and 1.2x PB (on 2013E book value per share (BVPS), ex biological gains) implied by its target is fair. Given the limited upside, MER stays Neutral. Better soft commodity demand, falling midstream capacity, or a transformational deal would change MER’s view.

Source: Macquarie Research - 14 May 2013