• Tropical Oils ~34% of FY18 PBT
• Likely lower crush margins in 1Q19
• P/B at close to 5-yr mean

A Fort When CPO Prices Fell in 2017-2018

Despite a 35% fall in crude palm oil prices from early 2017 to end 2018, Wilmar’s share price has fallen by only 13% over the same period, likely due to its more diversified portfolio comprising Oilseeds and Grains, Tropical Oils, Sugar and others. This compares to the STI’s 6% rise over the same period. Indeed, the group’s dividend was even higher at S$0.105/share in FY18 vs. S$0.10/share in FY17 and S$0.0605/share in FY16.

Tropical Oils Contributed 34% of Pre-tax Profit in FY18

Given that Wilmar is a more diversified play compared to other pure-play CPO stocks, it has relatively more stable earnings and dividends. Tropical Oils accounted for 34% of pre-tax profit in FY18 and 25% of pre-tax profit in FY17. In comparison, Oilseeds and Grains contributed 54% of pre-tax profit in FY18 and 47% in FY17. A recovery in CPO prices would benefit Wilmar but at the same time good performance in the soybeans and sugar segments are also required to move the needle in the right direction.

Look Out for Soft Soybean Crush Margins in 1Q19

The group is expected to report its 1Q19 results in about a month’s time, during which the group may see a negative impact on earnings due to weak soybean crush margins as a result of 1) the sharp decline in meal demand from the outbreak of African swine fever in China and 2) a sharp drop in Brazilian soybean basis, but this is expected to improve in 2Q19. As such there could be some caution in trading prior to the lead up of the results.

WIL’s P/B Close to Five-year Mean

In terms of valuations, Wilmar is trading at 0.93x forward P/B, close to its five-year historical mean. Though the company may see an impact in earnings due to weak soybean crush margins in 1Q19, a proposed spin-off of its China business operations by the end of the year would unlock value and inject more transparency to valuations. Based on 0.9x forward P/B, we derive a fair value estimate of S$3.44 for Wilmar. Maintain HOLD.

Source: OCBC Research - 9 Apr 2019