• We remain positive on Wilmar International (SGX:F34) and expect better earnings in 2H19. Contributions from oilseeds & grains should improve as China’s soybean crushing margins have improved and we see a rise in festive sales volume from the food products division.
• The improvement in tropical oils’ PBT margins is expected to hold in 2H19 as well. With the sugar crushing season having started in June, we foresee positive contribution vs losses in 1H19.
• Maintain BUY. Target price: S$4.40.

What’s New

Share price weakness could be due to concerns on soybean crushing operations in China.

• Wilmar International's share price fell 5% last week. We reckon the selling could be due to noises from the ongoing trade tension between the US and China.
• Recall that in Aug 19, China announced it will impose an extra 5% tariff on US soybeans from 1 Sep 19, and then to allow China to import soybeam meal from Argentina. This may have raised concern over Wilmar International’s soybean crushing operation in China. Wilmar International is the second-largest soybean crusher in China with a crushing capacity of 15m-16m tonnes (vs China’s total crushing capacity of 87m-88m tonnes).

Do not get too worried.

• The import duty on US soybean is temporarily suspended and China has also given out an import quota of 5.0m tonnes of duty-free soybean. On top of that, if soybean meal imports are more competitive, Wilmar International may source directly and use its crushing capacity to crush other oilseeds. Contribution from its China soybean crushing business is no longer that significant.
• Based on diclosures by Yihai Kerry Arawana Holdings (YKA), China operation contributed 59.2% of Wilmar International’s 2018 operating profit, of which feeds & oleo contributed 25.8% or only 15% of total operating profit. Wilmar International’s crushing margin in 2018 was the highest in the last five years and yet contribution to operating profit was only 15%. For 2019, we expect a strong performance from tropical oils and this would be able to mitigate the weakness from China’s feeds & oleo operations.

Positive crushing margin in China.

• China’s soybean crushing margin has turned positive since end-May 19 and we expect this to have a positive impact on Wilmar International’s 2H19 earnings. 1H19 PBT contribution from oilseeds & grains fell 67.5% y-o-y due mainly to the crushing losses in 1Q19 and low seasonal demand in 2Q19.
• A turnaround in 2H19 is expected to come from stronger PBT from YKA’s food products division on the back of higher sales volume (driven by festive demand) and better margins (higher utilisation rate).

Stock Impact

Demand for animal feed was not that bad.

• Based on the recent presentation by an oilseeds & grain research firm Shanghai-Pansun, based on the cost efficiency of protein in feed formulation, soybean meal still has a cost advantage over sunflowerseed meal. Soybean meal demand also benefitted from the restriction of imports of rapeseed meal from Canada since Mar 19. Pansun estimated soybean meal demand may drop 6% in the Oct 18/Sep19 season (vs the market’s forecast of mid-teen decline) but increase 3.7% in the Oct 19/Sep20 season. The shortfall from live hog feeds is expected to be offset by higher feed intake from broiler, layer and aquatic industries.
• As the second-largest soybean crusher is China, Wilmar International will continue to see high utilisation rate for its crushing operations. Coupled with positive margins, Wilmar International will deliver better results in 2H19.

Getting higher biodiesel allocation in Indonesia.

• Wilmar International is the largest biodiesel player in Indonesia and has secured an additional 5.6% allocation from the recent revised volume allocated by the Ministry of Energy & Mineral Resources in Indonesia. The total volume under the 20% biodiesel mandate (B20) is now at 2,114,960kl vs 2,002,807kl previously.
• With the Indonesian government targeting to implement B30 biodiesel blending by 2020, we do expect the volume allocated to Wilmar International will remain at least at 30% of total allocation of 9.3m kl. This will see at least another 30% increase in biodiesel volume, which is close to its current annual capacity of about 3m tonnes. Wilmar International is already putting in capex to expand its biodiesel capacity and new capacity should come on stream by end-19.
• Wilmar International is ahead of peers in terms of biodiesel capacity expansion and is ready to capture rising demand for volumes in 2020. The biodiesel sales volume is still about 8% of Wilmar International’s annual tropical oils’ sales volume of 24m-26m tonnes.

Earnings Revision / Risk

• No change to earnings estimates. We forecast core net profits of US$1,205m, US$1,348m and US$1,443m for 2019-21 respectively

Valuation / Recommendation

• Maintain BUY and target price of S$4.40, which reflects a blended 23x 2019F PE for China operations and blended 11x PE for non-China operations.
• Accumulate at current price to ride on the better 2H19 earnings and the unlocking of value through the listing of YKA on ChiNext board of the Shenzhen stock exchange. This would support Wilmar International's share price in the near term and we expect further re-rating once the IPO is completed.

Share Price Catalyst

Listing of YKA.

• Potentially, YKA’s IPO pricing is likely to be pegged at 23x 2018 PE. With its strong market positioning and branding in China, we do expect share price to perform well upon listing. This could lift trading sentiment on Wilmar International as well.
• Post listing of YKA, we expect Wilmar International to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.

Source: UOB Kay Hian Research - 24 Sep 2019