Wilmar announced their third quarter results last week and Macquarie Equities Research (MER) released a research report on 12th Nov stating that although Wilmar’s management is optimistic on long term growth prospects, it will take several years for expansion plans to develop. MER maintains a ‘Neutral’ rating on the company, some excerpts are found below…
 
Event
Management was more upbeat in today’s 3Q14 meeting versus last quarter’s, buoyed by a good set of headline results. Moreover, the company remains optimistic on the long term growth prospects of its expansion projects in sugar, and branded rice and flour. But these will take several years to gestate.
 
But for the next couple of years MER thinks visibility will remain limited to the rolling next quarter. MER sees structural overcapacity in Wilmar’s traditional midstream activities buffeting earnings growth and returns, and stay Neutral.
 
Impact
Key question 1: are Oilseeds & Grains margins sustainable? According to management, 3Q14 China soybean crush margins benefitted from tight supply, low participation by speculators and well-timed purchases by Wilmar.
 
With supply constraints now easing, opening the door for more competition, Wilmar indicated that crush margins would remain positive in 4Q14, but come in lower than in 3Q14. Wilmar also said it ‘hoped’ that margins could remain consistently positive over the medium term. MER thinks the health of the market depends on the speculators’ ability to re-enter it, which is difficult to handicap.
 
Key question 2: what are sustainable Palm & Laurics margins? Wilmar does not see the crude palm oil (CPO) refining industry going down the same road as China soybean crushing, but today’s overcapacity is large enough to crimp industry margins for some time. Wilmar is outperforming peers due to a higher exposure to value added products. But the barriers to entry are not insurmountable there. And Wilmar’s call for future margins of US$15-20 per ton represents a step down from the ~US$32 average of the past five years.
 
Sugar and Consumer doing well, but still relatively small: Wilmar’s soybean and CPO midstream divisions will account for ~40% of consolidated profit before tax (PBT) this year MER estimates. Within the remaining ~60%, Sugar (11%) and Consumer Products (17%) stand out in terms of performance. Consumer is seeing good growth in branded cooking oil outside China, alongside branded rice and flour in China. In Sugar Merchandizing (i.e. trading) Wilmar continues to profitably build share from a low base.
 
MER’s earnings and target price revision
MER raises its FY14 earnings per share (EPS) estimate by 9% on the back of a good 3Q14, but revisions are more muted thereafter given the visibility issues cited above. MER raises its medium term forecasts, which drive its valuation, by 4% (2014E-18E). MER’s price target rises by a similar percentage to S$3.10 from S$3.00.
 
MER’s Price catalyst
12-month price target: S$3.10 based on a discounted cash flow (DCF) methodology.
Catalyst: Full year results reported in February 2015.
 
MER’s action and recommendation
Wilmar’s 1.0x headline price to book value continues to look fair to MER. On MER’s numbers, earnings are set to grow at a 5% compounded annual growth rate (2014E-16E), at a high single digit return on equity (~8%), which is very close to Wilmar’s cost of equity, in MER’s view.

Source: Macquarie Research - 19 Nov 2014