• WILMAR INTERNATIONAL LIMITED (SGX:F34) is likely to sustain its good 1Q19 results performance into 2Q19 with the recovery of crushing margin and higher soybean crush volume.
• The recent round of tariff hikes by the US and China have lesser impact on soybean market vs the previous round. Thus there is less distortion to its soybean crushing operation and the securing of raw materials. Tropical oils will continue to do well with good downstream margins.
• Maintain BUY. Target price: S$3.90.

What’s New

Good performance is sustainable.

• Post briefing, we maintain our positive view on WILMAR INTERNATIONAL LIMITED (SGX:F34). In our opinion, Wilmar’s good 1Q19 earnings performance is sustainable into 2Q19.
• Despite small losses in soybean crushing in 1Q19, its oilseeds & grains division was still able to deliver positive contributions (1Q19 PBT of US$91.1m). This is a strong signal to investors that fluctuation in soybean crushing operation does not have as significant impact on its performance as compared with the past, attributable to better and larger contributions from rice & flour and consumer packs in China. Thus, with the recovery of soybean crushing margins and higher utilisation rate for 2Q19, higher contribution is expected from oilseeds & grains division q-o-q.

Less impact from the recent tariff hike arising from US-China trade negotiation.

• US and Brazil soybean prices did not have huge a reaction as compared with the first tariff announcement in Jul 18. The price difference between the two countries was only around US$7-8/bushel vs US$90-100/bushel back in 2H18. The main factor contributing to this was the high supply of soybean amid weak demand from China (main soybean consuming country).
• After the 2H18 experience, Chinese buyers are not in hurry to secure soybean supplies and are waiting patiently for the price to stabilise. There is still ample soybean supply in China, and the soybean crushing sector is also recently undergoing consolidation again, which is allowing Wilmar to capture larger market shares. This is expected to translate into higher utilisation rate and higher sales volume in 2Q19. As such, we are expecting higher q-o-q contributions from oilseeds & grains.

China IPO on track.

• Listing of Wilmar China (Yihai) is on track and likely to be listed in 4Q19. The listing submission together with the draft prospectus will then be submitted to China Securities Regulatory Commission (CSRC) sometime in early-3Q19. The final listing date will depend on when this application will be granted by the CSRC.
• The IPO proceeds will be fully utilised to fund its expansion in China and free up cashflow to declare special dividend to Wilmar’s shareholders.

Stock Impact

Tropical oil benefited from low feedstock prices and good hedging strategy.

• The low palm and palm kernel prices as a result of supply continue to favour large downstream operators. Despite the withdrawal of exports levy in Indonesia (which led to lower refining margin), Wilmar’s tropical oils still delivered slightly better PBT margin of 2.9% in 1Q19 vs 2.8% in 4Q18 and 1Q18.
• Palm prices may be close to bottoming now, but high soybean inventory is still capping the upside of palm prices. If palm prices continue to stay low with higher CPO production to come in 2H19, there is a possibility of bringing forward the implementation of biodiesel mandate to 30% (B30) of biodiesel blending from B20, which is supposed to take effect in 2020.
• Moving from B20 to B30 will increase the demand by approximately 3.0m kilolitre or 2.6m tonnes (B20: approximately 6.0m kilolitre vs total Indonesia production of about 43m tonnes in 2018).

Sugar benefitted from positive government policy in India and good forward selling.

• Global sugar prices are still low due to oversupply. Despite depressing sugar price, sugar cane planting has not decreased as producing countries are supported by favourable local policies. Sugar division likely to report small earnings from India and the start of the milling season in Australia.
• Positive contributions will also be supported by good hedging strategy, better performance from merchandising, refining and consumer products (expanding into branded segment).

Earnings Revision / Risk

Maintain earnings forecasts.

• We maintain our net profit forecasts of US$1.24b and US$1.43b for 2019-20 respectively. We introduce net profit forecast of US$1.51b for 2021.

Valuation / Recommendation

Maintain BUY and target price of S$3.90.

• This translates into 13.7x 2019F blended PE, which is slightly higher than Wilmar’s five-year mean (1-year forward PE of 13.2x). We ascribe 20x 2019F PE for the oilseeds & grains division, 15x PE for the tropical oils division, 8x PE for the sugar division and 10x PE for the other businesses.
• We believe there is still upside to Wilmar’s share price despite the 17% ytd rise as current share price is only factoring in 17x PE for its China operation.
• Our fair value of S$3.90 factors in 20x PE for the China operations. Assuming 23x and 25x PE, our fair value would be at S$4.10 and S$4.25 respectively.

Share Price Catalyst

• Potential listing of China operations.
• Value-enhancing M&As.

Source: UOB Kay Hian Research - 16 May 2019