• New earnings forecast to factor in latest FX and commodities price assumptions.
• We believe Wilmar can withstand trade war tensions.
• Positive earnings momentum to sustain in 2019.
• Maintain BUY rating with Target Price of S$3.59.

We Keep Our BUY Rating and New Target Price to S$3.59

Wilmar’s solid earnings performance is likely to continue into 2H18 and 2019.

Wilmar’s share price valuation is undemanding and offers an attractive risk and reward profile to investors, even amid the uncertainties arising from the US-China trade wars. We revised down our FY19F-FY20F earnings by 5-6% to factor in our new FX and commodities price assumptions, and continue to maintain a solid view toward its earnings prospects.

Where We Differ: Trade War Tensions Is Not a Major Concern

We believe Wilmar is able to withstand the trade war tensions and continue to book solid profitability as it maximises crushing capacity and efficiencies.

Wilmar’s downstream on Tropical Oil division should also maintain their profitability amid the low CPO price environment. At the current price, we believe that the market has fully priced in concerns over earnings fluctuation in its Tropical Oils as well as Oil, Seeds and Grains segments, on account of lower commodity prices.

Beyond Earnings Performance: Catalyst From Listing of China Operations

Possible IPO plan (A-share listing) for its China operations may drive its share price at a time closer to its potential listing date. We note that China operations contribute 60% of Wilmar’s pretax profits.

Valuation

We rolled forward the base year in our DCF methodology (to FY19F) to arrive at our slightly lower Target Price of S$3.59 (WACC 7%, TG 3%) post earnings revision

Balance Sheet

Decent balance sheet.

Adjusted for liquid working capital, the group’s net debt-to-total equity ratio was 82% as at end of June 2018. We forecast FY18 EBITDA/interest ratio at 4.9x, while FY18 current ratio is forecast at 1.2x

Value creation on progress.

We expect the group to earn a ROE- WACC spread of 1.0% in FY18F/19F versus negative in the last two years. With capex outlay of US$847-830m p.a. in FY18F- 19F, we expect Wilmar to continue to record positive free cash flow.

Share Price Drivers

Rising contribution from Consumer and JV may address concerns over exposure to commodities price.

Wilmar currently trades close to -1SD forward PE (traded at +1SD in 2016), principally reflecting concerns about the latest development in China soybean crush margins. We believe the market has already priced in the group’s performance in the last two years. Any visible improvements in its Consumer division (i.e. rice & flour milling) and/or JV contribution from Goodman Fielder, as well as potential inclusion of Soya Ruchi would drive Wilmar’s share price higher, in our view.

Key Risks

Volatility in CPO prices and USD exchange rates.

Continued strength in CPO prices may deliver better-than-expected earnings, while lower energy prices from expansion of US shale gas would have an adverse impact on demand for vegetable oils for biofuels. Likewise, volatility in USD would affect profitability of planters in general.

Regulatory changes.

Any further increase in Indian import duty of refined oils or changes in the structure of Indonesian/Malaysian export taxes would impact demand for CPO/refined oils.

Market sentiment.

Changes in fund flows towards or out of emerging markets would affect valuations of plantation counters.

Source: DBS Research - 10 Oct 2018