• Softer quarter for Tropical Oils, Sugar
• To pick up from 2Q
• Soybean impact if standoff is prolonged

Core 1Q18 Within Expectations

Wilmar reported a 5.7% YoY rise in revenue to US$11.2b but saw a 40.6% drop in net profit to US$203.3m in 1Q18 with lower contribution of non-operating items (impacted by marked-tomarket losses arising from investment securities), higher selling and distribution expenses (+16% YoY with increased advertising and promotion activities due to later Chinese Spring Festival in 2018) and administrative expenses (+8.5%).

Excluding one-off items such as FV adjustment on AFS financial assets, 1Q18 core pre-tax profit was 21% of our full year estimate, within expectations.

The lower profit was mainly due to the difficult operating environment in the Tropical Oils business and seasonal sugar losses in the quarter, but the group continued to see strong growth in sales volume from the Oilseeds and Grains segment, arising from higher crushed volume and the later Chinese Spring Festival in 2018.

More Positives Than Negatives Currently

With respect to China’s import tariffs on US soybeans, the group mentioned that a prolonged standoff (if there is one) between China and the US would affect the utilization of its crushing plants, but this will be partially mitigated by better performance from its flour and rice businesses.

We estimate that the rice and flour business currently accounts for more than 10% of the oilseeds and grains segment, but management aims to grow this segment which has relatively more stable margins. The Tropical Oils segment will likely perform better in subsequent quarters as well.

Production for this year may be about 10% higher with more favourable weather, and refining margins may improve in the next few quarters.

As for the Australia sugar milling business, it is likely to pick up from 2Q18. The group’s listing of its China business remains on track, and is likely to happen in mid-2019 or 2H19. The minimum free float is 10%, and we do not expect a significant deviation from this for the listing.

Meanwhile, the group remains on the lookout for acquisition opportunities – JV Adani Wilmar has put in a bid for debt-ridden edible oil firm Ruchi Soya. Our FV estimate remains at S$3.51.

Source: OCBC Research - 14 May 2018