Share Price S$3.16
Target Price S$3.80
Smooth Sailing Into 2H13
Wilmar is expected to deliver better 2H13 earnings on higher volume growth across all divisions and star performers will come from the palm & laurics and sugar divisions. Sugar crushing is 40% completed so far and sugar yield is seeing a marginal impact from YCS. Thus, sugar is on track to deliver the growth on volume and better margins. Maintain BUY. Target price: US$3.80.
• Key takeaway from 2Q13 analyst briefing.
• Management sounds confident of delivering better earnings in 2H13, driven by higher sales volumes across all divisions. This is in line with our expectation and we are maintaining our earnings estimates and BUY recommendation.
• Key trends to track for 2H13:
a) Sugar contribution continues to be good, given that the impact of the yellow canopy syndrome (YCS) on sugar yield is marginal.
b) Contribution from the palm & laurics division is being held up by the sales volume increase in higher value-add oleochemical and specialty fats products, which compensated for the squeeze in refining margins.
c) Upstream contribution in 2H13 will be supported by higher production lower cost as fertiliser cost is coming off.
d) China crushing and consumer pack volume would be higher in 2H13 but margins would be flat.
• YCS impact is mild so far. About 40% of the harvested sugar cane is being crushed and so far, it has only a marginal impact on sugar yield. Although sugar prices have weakened by 15% ytd, Wilmar is confident of delivering better sugar earnings as Wilmar has locked in the bulk of its production at higher prices while the weak A$ reduces production cost. This sector will see the strongest contribution in 2H13 as milling makes most of its profit in 3Q on peak harvest and optimum milling.
• Net positive from lower potash prices. The lower potash prices would have the following impact on Wilmar:
a) Positive for upstream operations. Fertiliser cost makes up 30-35% of total production cost. Potash application is about 50% of the total fertiliser application. A US$100/tonne drop in potash prices, will cut the cost of production per CPO tonne by US$20-30, or 14-17% of total production cost.
b) Negative impact on fertiliser trading. Lower potash prices will result in a write-down on inventory value for its fertiliser trading business. But this is likely to be offset by the much larger positive impact from its upstream operations.
• Weather affects oil palm tree production. FFB production is likely to fall below expectation in 2H13 as the dry weather affects yield and delays the ripening process. When rainfall starts to pick up, 2H13 production would be significantly higher than in 1H13 but would still come in below our earlier growth expectation for 2013. Management is now guiding for a lower production growth of 4-5% for 2013 (from a 10% guidance). We have adjusted down our FFB production growth expectation for 2013 from 10% to 3.3%. This reduces our EPS estimate by 0.8% for 2013.
• Crushing margins to stay positive in 2H13. Soybean crushing volume is picking up as chicken consumption in China has rebounded back to normal levels after the bird flu breakout in early-13. Management is confident that soybean crushing margins in China will stay positive in 2H13 as the demand is still relatively stable. The lower oilseed & grain pre-tax margin of US$3.4/tonne in 2Q13 (1Q13: US$10.1/tonne) was mainly due to higher milling volumes for rice and flour, which have lower margin.
• Impact from cautious consumer spending in China. The shift in consumer spending pattern has affected demand for the bulk business although it is good for the branded consumer pack cooking oils because China families are now eating more at home. This change in consumer spending behaviour benefits Wilmar, which have close to 45% of the China branding cooking oil market share and this segment delivers higher margins than that of its bulk business. For 1H13, consumer pack sales volume rose 15% yoy with a higher pre-tax margin of US$35.7/tonne (1H12: US$32.4/tonne). For 2013, we forecast a sales volume growth of 15% and pre-tax margin of US$32/tonne.
• Balance sheet has strengthened with cash building up on positive net interest income. In 2Q13, Wilmar generated a positive net interest income as finance income (US$133.6m) was higher than its finance cost (US$121.5m). This came as a result of the company restructuring its debts, which has reduced its interest cost by 124bp yoy while deposit yields remained relatively unchanged.
• We fine tune our earnings assumptions to take into consideration: a) lower FFB production growth for 2013, b) higher sales volume and pretax margin for consumer packs, and c) our higher volume growth for sugar merchandising & processing of 50% (from 10%) after the strong 1H13 performance.
• Net adjustments to our EPS estimates are mild ( < 1%). We are now expecting EPS of 21.0 US cents, 24.4 US cents and 27.9 US cents for 2013, 2014 and 2015 respectively.
• Maintain BUY and target price of S$3.80 based on the sum-of-theparts (SOTP) method, implying a blended PE of 14.0x 2013F and 12.1x 2014F PE.
Share Price Catalyst
• A strong turning point in the China’s soybean crushing market brought about by increased utilisation¸ which will deliver sustainable margins. • Weather disruption affecting the global oilseed, palm oil and sugar supplies, leading to stronger prices.
Publish date: 12/08/13