Friday, August 16, 2013

Wilmar International : Proven business model (CIMB)

Wilmar International
Current S$3.16
Target S$3.74.
Proven business model

 Wilmar’s briefing left us feeling more positive on the group as we sense the benefits of lower raw material costs for its downstream division and expansion into value-added palm products can more than offset weaker CPO prices and lower refining margins.

We expect the group to post better earnings in 2H13 vs. 1H13, driven by higher sugar and palm oil earnings. It also highlighted its plans to achieve RSPO certifications for all its estates by FY16. We maintain our earnings forecasts, SOP-based target price and Outperform rating. A recovery in earnings can catalyse the stock.

What Happened
At its post-results briefing, Wilmar revealed 1) its oilseed and grain division is expected to remain profitable in 2H and can post better number as the meal demand in China has recovered after the bird flu scare; 2) its palm refining margins have come under pressure due to new capacity additions in 1H13, but this is offset by stronger margins at its higher value-added downstream division and higher processing volumes. It is confident of sustaining the higher margins achieved at its value-added downstream division in 2H13; 3) it expects its sugar division to post a better contribution in 2H13 due to higher production volume at its sugar mills in Australia and refining margins from its Indonesia sugar refineries. The selling price for this division will be better than the current market price as the group has sold forward some of its production; and 4) its plantation unit is expected to do better in 2H13 due to higher production.

What We Think
The overall guidance by the group is broadly in line with our projections for stronger 2H13 earnings. We note that the Yellow Canopy Syndrome (YSC) – a mysterious disease that has affected some sugar cane plantations in Australia - has not materially impacted the sugar extraction rate at its mills so far, as earlier feared, and the timely addition of new specialty fats, oleo and other higher value-added palm products capacities have helped offset the weaker margins at its refining business in Indonesia.

What You Should Do
Wilmar remains one of our top picks in the plantation sector as the stock trades at a P/BV of only 1.1x and its earnings have proven to be more resilient vs. the upstream planters in times of lower CPO prices, thanks to its integrated agribusiness model.

Key highlights from the briefing
We attended Wilmar's 2Q13 post-results briefing and the key highlights are:
The oilseeds and grains division remained profitable for the fourth consecutive quarter despite the bird flu scare and overcapacity concerns. It revealed that PBT/tonne for this division was dragged down by the lower margin achieved by its flour and rice processing businesses. Excluding these, the soybean crush margin achieved was higher than US$3.4 per tonne achieved in 2Q13. It is optimistic that this division will perform better in 2H13 as the soya meal demand recovers after the bird flu scare in 2Q13. The group added that the profitability of this division does not rely solely on the back-to-back crush margins but is also dependant on how well the company purchases its raw materials vs. its peers.

New refining capacities in Indonesia have resulted in weaker refining margins for the Indonesian refiners in 2Q13. However, Wilmar was able to buck the trend and delivered a 27% yoy jump in PBT for the palm and laurics division to US$36.2 per tonne in 2Q13. This is due to stronger profit margins achieved from its higher value-added downstream products (oleochemicals, specialty fats and biodiesel). The group is confident that the margins for the higher value-added downstream products can be sustained as we head into 2H13 as it will be adding more capacities. This and the higher sales volume will partially offset the declining refining margins in Indonesia and is broadly in line with our expectations.

Its consumer products division posted a 22% jump in sales volumes following the price reductions in Apr-May 2013. We gathered that the austerity drives in China have also helped boost sales as the consumers now choose to eat at home more often. The lower feedstock costs helped boost profit margins. The group explained the weaker qoq margin was due to lower margins recorded for its newer rice and flour businesses in China and weaker profit margin for consumer products business outside of China.

The group's plantations and palm oil mills division posted weaker earnings in 1H13 due to lower average selling prices and weaker-than-expected production. The group expects its estates to report stronger seasonal production in 2H13 and indicated that the weaker rupiah and ringgit will benefit this division as labour costs are denominated in local currencies. The lower potash price is also expected to benefit this division in FY14 through lower fertiliser prices.

The 1H13 loss of US$107m (1H12: US$137m) posted by its sugar milling business is not a huge concern as 1H13 is typically the off season. During this period, the milling division engages in plant maintenance activities to prepare for the crushing season that starts in Jun. The group also updated on the “Yellow Canopy Syndrome” issues in Australia. It revealed that based on 40% of canes crushed so far, it has not seen any negative material impact on the sugar content of the canes. As such, the conclusion based on the assessment so far is that the impact of this disease is not as significant as some industry observers had feared. In view of this, the group expects sugar production volume for FY13 to be higher than a year ago and indicated that it has locked in the selling prices for most of its sugar production. It also said that the weak Australian dollar is positive for this division as it lowers the cost of production. Overall, it is optimistic that the sugar milling and refining division will post better earnings this year. The sugar refining business in Indonesia will benefit from the lower raw sugar costs.

The group also spent some time highlighting to investors and bankers on its sustainability efforts. It revealed the key challenges and solutions facing the palm oil industry in its quest to achieve a sustainable palm oil production. It also highlighted that the group adopts a zero burning policy and will not develop estates on peat land. It has also recently decided to discontinue businesses with errant suppliers who breach the law by involving in “slash and burn” activities on its estates, which contributed to the haze in the region. Currently, more than 60% of its estates have achieved RSPO certification and the group hopes to complete certifications for all its existing plantations by FY16.

Its net gearing ratio remained stable at 0.86x and the adjusted net debt-to-equity remained low at 0.4x as at end-Jun13. The interest coverage ratio jumped to 15.4x due to lower net interest expenses and better earnings. It has only used up 63% of its total credit facilities of US$14.4bn. As such, the group has no issues funding its expansion and working capital needs. It also reiterated that it plans to spend around US$1.3bn on capex in FY13 and US$1bn in FY14. The group is currently in the midst of syndicating US$1.5bn term loans which are underwritten by six banks, to refinance its borrowings that are maturing in Nov this year.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 08/08/13

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