Crush Margins to Remain Volatile; Switch to First Resources

• Recall that Wilmar International (SGX:F34)’s 2Q19 Oilseeds & Grains PBT fell 80% y-o-y on the back of weak soybean crushing margins. Thankfully, August’s Chinese crush margins rose sharply and so did palm-oil prices.
• Despite higher input costs, Indonesian bio-diesel margins have also remained positive. These combined should provide for a better 3Q19.
• Still, we remain cautious as:
  1. significant risks exist from escalating trade-war tariffs at the start of the North American soybean harvesting season; and
  2. an effective resolution of the African Swine Flu (ASF) remains elusive.
• Maintain HOLD.
• We prefer First Resources (SGX:EB5), which should benefit from rising palm-oil prices, its young acreage and low costs.

Chinese Crush Margins Rising

• August’s Chinese soybean crush margins rose to CNY241/tonne, their highest since Oct 2018, after posting losses in July. Direct government intervention to address ASF pork-supply disruptions likely played a part. Recall that soybean meal is a key input of pig feedstock. The above should help turn around Wilmar’s Oilseeds & Grains segment, which contributes nearly 50% to revenue.

Palm-oil Support From Both Ends of Value Chain

• Palm-oil prices rose 11% in August. Rising demand – particularly from China, India and Indonesia – and falling production tightened inventories. Higher prices upstream and strong downstream demand should strengthen Wilmar’s integrated palm-oil segment in 2H19.

Still HOLD; Prefer First Resources

• Despite margin & volume drivers treatment for ASF spell uncertainties in the medium.
• Maintain HOLD and our Target Price of SGD3.89, based on blended DCF (WACC 5.3%, 1% LTG) and global peers’ 17.4x 2020E P/E.
• We prefer First Resources for its low-cost production, integrated business and young acreage, which should benefit from rising palm-oil demand and prices. See report: First Resources - Expect A Much Better 2H19.

Source: Maybank Kim Eng Research - 3 Sep 2019