• Maintain BUY and SGD3.69 Target Price, 15% upside, with a 3.4% yield.
• Wilmar remains our Top Pick for exposure to the plantation sector.
• We raise FY18 earnings estimate by 5% on the back of a strong 3Q18 result, while 4Q outlook remains optimistic.
• Moving into FY19F, we believe there is potential for another special dividend, after the IPO of its China operations takes place, which could further boost its dividend yield.

We Continue to Like Wilmar, Due to

1. Strong processing margins for palm oil. With a higher CPO production across the industry, we believe palm refining margins will continue to stay in the black in 4Q18, as well as in FY19F. We forecast FY19 to be a stronger year for Wilmar’s tropical oil division, on the back of a wider palm oil and gasoil spread, a higher biodiesel demand from Indonesia’s B30 mandate and export demand;
2. Margin expansion from consumer products. In addition to the group’s Arawana cooking oil, which enjoys a 45% market share in China, its flour and rice consumer packs have also gained traction in the country. Management believes there is much more room to grow its consumer-packed rice, given the market size and a lower penetration of packaged rice. Over the long run, we believe margins will expand as the group grows its scale in the rice and flour segments. We also like the group’s ability to turn its by-products into sellable items such as rice bran oil, rice bran meal or wheat bran meal, in order to capture additional margins;
3. Utilisation rate of crushing capacity maintained. Q-o-q, 3Q18 crush volumes were still on a rise. The African swine fever is expected to have a negative impact on soymeal demand in the short run. We think the impact on Wilmar is offset by the exit of other Chinese soybean crushers from the industry, which results in a market share gain for the group. Moving into FY19, we see a potential spike in soymeal demand, when the African swine fever subsides and farms start growing new herds of piglets again;

• During the 3Q18 analyst briefing, Mr Kuok, the CEO, highlighted that China sees no shortages of soybeans despite the China-US trade war. Hence, we believe the group still has adequate reserves of soybeans to maintain an above-average crushing margin for 4Q18. However, we believe the low-cost inventory will deplete in early FY19 and crush margins should go back to a normalised level next year.

Maintain BUY With Unchanged SOP-derived Target Price SGD3.69

Source: RHB Invest Research - 16 Nov 2018