• Untimely purchases hit oilseeds segment
• Paring FY16 NPAT forecast by 25%
• Downgrade to SELL with S$3.05 FV

Expects US$230m net loss in 2Q16

Wilmar International Limited (WIL) now expects to report a net loss of around US$230m in 2Q16 due to “challenging operating conditions” particularly in oilseeds and grains manufacturing and its sugar business segment. For example, “untimely purchases” of soybeans in the highly volatile and disruptive market resulted in the group recording significant losses; adds that the unexpected flooding in Argentina also affected soybean harvest.

And in its sugar segment, the expected 2Q losses are likely to be larger than usual, given the delay in harvesting due to rain and accounting mark-to-market losses on hedges; further warns of lower volume of cane crushed in FY16 due to the dry weather in Australia. However, WIL still expects to be profitable for 1H16, albeit earnings will be “significantly lower” from a year ago; this as it posted a reported net profit of US$239.4m in 1Q16.

Previously warned of “challenging operating conditions”

To its credit, management did highlight that it would be facing “challenging operating conditions” in the second quarter during its 1Q16 analyst briefing, citing higher feedstock prices, weaker crush margins and continued volatility in sugar prices. It also mentioned that it will continue to see healthy growth in its Consumer Products business. Coupled with the expected seasonal turnaround in 2H for its sugar business, WIL expects the operating environment to “normalize” in 2H16.

Still focused on growing long-term downstream business

Near-term volatilities aside, we expect management to maintain its longer-term strategy of making its integrated business model even more efficient while continuing to grow its downstream business, especially into the food and home care segment; this as it continues to see great potential from the rising consumerism in Asia.

But adjusting for the expected 2Q loss, we pare our FY16 earnings estimate by 25% and FY17 by 5%; this in turn reduces our fair value from S$3.34 to S$3.05. We also downgrade our call from Hold to SELL and would probably reengage closer to S$2.85.

Source: OCBC Research - 20 Jul 2016