• Reiterate BUY with unchanged Target Price of SGD4.50, 17% upside and 3% dividend yield.
• Wilmar International (SGX:F34) is our plantation sector top pick. We remain upbeat on the stock as we believe the worst is behind us while the outlook for 2H19 looks rosier on the back of an improving soybean crush utilisation and increasing CPO prices.
• The upcoming China IPO would continue to support the share price in the near term and we expect a further rerating of the Wilmar's share price once the IPO is completed.

Crush Margins in China Set to Improve

• The disappointing result in 2Q was caused by low crush margins due to reduced pig stocks in China and implicitly a lower demand for soybeans due to the African swine fever.
• Moving into 3Q, a stronger feed demand from the poultry and aqua sectors should partially offset the reduced demand from the pork sector as consumers substitute pork meat with other sources of proteins.
• In addition, pork prices in China have soared 47% y-o-y in August due to a shortage in supply. The Government has since introduced subsidies to encourage farmers to raise inventories. With rising prices and subsidies, we expect industrialised farmers to begin growing pig stock to capitalise on the higher margins.
• In turn, this should spark an increased demand for soybean meal from 4Q onwards. In addition, we believe the widening of Brazilian soybean basis should be beneficial to the group’s hedging strategy, reducing input costs and improving soybean crush margins.

News on Trade War Talks Are Largely Noise for Now

• We think the additional 5% tariff on US soybeans implemented on 1 Sep 2019 would not have any significant impact on Wilmar as the group has been purchasing Brazilian soybeans since the initial 25% tariff introduced in Jul 2018.
• A resolution to trade war might also not have a major positive impact as the US soybean prices would likely adjust upwards to offset any reduction in tariffs. However, the ability to access the US soybeans would definitely be beneficial to Wilmar’s operations in the longer term.

Tropical Oil Segment Should Continue to Do Well

• CPO prices have recovered from the lows of MYR1,865/tonne in July to the current levels of MYR2,100/tonne. Wilmar’s upstream plantation business would stand to benefit from the higher prices. At the same time, we believe downstream margins should remain strong for the next few quarters.
• Currently, the price differential between gasoil and palm oil at USD81/tonne suggests that biodiesel is still very profitable. Management has also highlighted its expectation for a CPO price recovery which we believe would suggest that the group has positioned itself to capture higher margins in the upstream while keeping low-cost inventories for its downstream business in subsequent quarters.

Source: RHB Invest Research - 13 Sep 2019