Towards Financial Freedom
Wilmar - Price controls are back HOLD
- According to Bloomberg, the Chinese Government has asked Yihai Kerry Investment Co, a subsidiary of Wilmar International Ltd, to continue complying with government management policies on the country's food sector.
- According to a previous report on Bloomberg, government officials in China has asked suppliers to keep prices of packaged products, including cooking oil, stable to avoid stoking inflation.
- This is not positive for Wilmar. We reckon that operating conditions in the soybean crushing and refining division would remain challenging. Also, we believe that Wilmar's consumer products division, which sells mainly cooking oil, could start facing margin erosions from 3QFY12 onwards.
- Although soybean prices have been rising, Wilmar will not be able to increase selling prices of soymeal and cooking oil products due to the 'unofficial' price controls.
- In 2QFY12, soybean prices remained high from early-April until early-May. Soybean prices fell almost 10% from a high of US$13.92 1/2/bushel on 1 May 2012 to a low of US$12.57 3/8/bushel on 1 June 2012. Since bottoming in early-June, soybean prices have surged by roughly 34% to a high of US$16.86 7/8/bushel on 20 July underpinned by the drought in the US.
- Soybean crushing and refining division accounted for 20% of Wilmar's pre-tax profit in FY11. The consumer products division accounted for another 4%.
- Currently, we are assuming that the soybean crushing and refining division would record a pre-tax profit of US$10/tonne in FY12F. The division's pre-tax loss per tonne was US$11.91 in 1QFY12.
- As for the consumer products division, we have assumed a pre-tax profit of US$20/tonne in FY12F, which is flattish compared with US$19.40/tonne recorded in FY11.
- We maintain a HOLD on Wilmar due to its inability to increase selling prices of its products, stemming from regulatory risks. We would be reviewing our fair value for Wilmar. The group's 2QFY12 results are scheduled to be released on 14 August 2012.
Source: AmeSecurities
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