Tuesday, September 3, 2013

Wilmar International : Can it catch up in the second half – which of the brokers is right?

Wilmar International

28/8/2013 – Analysts appear to be more optimistic about the prospects for Wilmar International than even the management, after the palm oil conglomerate posted second quarter results.

Management says the operating environment remains challenging, but analysts expect more from H2 2013.

Price targets range from the highest at S$3.72 to the lowest at S$2.49.

The company reported these financial results for Q2 FY13 on August 6:

Revenue: -5.4% YoY to US$10.43 bln
Net Profit: +86.5% YoY to US$218.5 mln
Cash flow from operations: US$103.3 mln vs US$204.3 mln
Cash Reserves: US$1.22 bln vs US$1.11 bln

Final Dividend: 2.5 cents vs 2 cents

Will crushing margins thin further as Brazil continues to recover from port congestions and resume the lead in soybean supply?

Are depressed crude oil prices going to further set back plantation and fertiliser businesses?

What is to come of Russian associate contributions now?

Analysts surveyed by Reuters have an average OUTPERFORM call with a price target of US$2.96.

Bullish analyst report
Bullish analyst report

Maybank Kim Eng Research has a BUY call with an unchanged target price of S$4.60.

It says forecasts for the full-year will be beaten when seasonal sugar earnings kick in.

Question 1. Will sugar earnings boost earnings in the second half?

It sees evidence that earnings are rebounding off a cyclical low and the current stock price level represents an opportunity to accumulate the stock.

With all business segments except estates and palm oil mills showing growth, Maybank says, the group is expected to benefit from lower commodity prices since upstream crude palm oil accounts for only around 16% of pre-tax profit growth.

For example, pack oil volume and profit jumped more than 20%, even as prices were cut to reflect lower cost inputs.

That's because the on-going austerity drive in Europe means people are eating more meals at home, driving up demand for this consumer product.

Maybank believes the Group is building up leadership positions in products outside its traditional portfolio where it is already a dominant player and these will provide the next leg of growth.

For example, rice and flour volume grew 60% and 29% respectively, while scale in sugar is also building up quickly.

Sugar prices should improve as Chinese demand grows ahead of the Mid-Autumn Festival and Lunar New Year celebrations for 2014.

That's also the view of Phillip Capital Research, which says the performance was "slightly below expectations" at 41% of its full-year estimate.

The palm & laurics segment came in above expectations with stronger sales although margin fell slightly to US$36/MT which is still above the full-year forecast of US$33/MT.

Question 2. Can these margins be sustained?

Now, Phillip has cut profit forecasts for because of lower crushing and consumer products margins.

But it calls Wilmar a BUY with a price target of S$3.61.

DBS Vickers Research has a BUY with a target price of S$3.48.

CIMB Research says the performance was "commendable" given the challenging operating environment for some segments and weaker selling prices for crude palm oil.

But it expects 2H13 to deliver more.

The 87% spike in net profit is proof of the resilience of the Group's business model in the face of weak crude palm oil selling prices, says the broker.

Most pure upstream competitors had nothing but sharp declines to announce, they say.

Volume for palm and laurics rose 10% for Q2 and 9% in 1H13, reflecting expanded refining capacity in Indonesia where margins have remained strong, despite concerns over rising competition.

Management says this is possible because of the stronger margins achieved for higher value-added downstream products.

The 1H13 refining margin of US$37.8/tonne is above the FY13 forecast of US$30/tonne.

The oilseeds and grains segment crushed less oilseeds in Q2 because of the avian flu scare, but raised flour production to stay profitable.

But the 1H13 crushing margin of US$6.8/tonne was below the FY13 projection of US$12/tonne.

Consumer products benefitted from 22% higher sales, following price reductions in April and May 2013.

The sugar merchandising segment already posted higher sales volume and earnings and higher contribution from the Group's Indonesian refineries.

The sugar refining segment also surprised with better earnings in 1H13, which is a result of sharper-than-expected increases to sales volume and profit margin.

The sugar milling division also has positive developments.

Lower losses were incurred in Q2 as the crushing season in Australia started earlier than a year ago when there was a delay because of wet weather.

That was the good news.

On the downside, plantation earnings took a hit as crude palm oil selling prices shrank.

At the same time, estates posted a 7% decline in FFB yields.

Management said this was the result of a small crop in Sarawak and dry weather in Kalimantan and Sumatra.

The harvest from larger mature palm oil estates mitigated the decline in yields.

Equally affected by the lower CPO selling prices was the fertiliser segment.

Associates contribution fell 19% due to lower contributions from associates in Russia, though this was partly offset by the improved earnings of associates in China.

The group also registered net losses from investment securities of US$20.7 mln in Q2 FY13 and US$16.9 mln in 1H13.

These have been deemed non-operating items and have been excluded from core net profit calculations.

CIMB says OUTPERFORM with a target price of S$3.74.

Bearish analyst report
Bearish analyst report

We cannot find any bearish reports to look into but here are some points to consider on the side of caution.

The Wilmar-Clariant JV for amines did not excite when China's economy remains a concern.

Management however maintains there will be returns to draw from this venture into oleochemicals and specialty fats.

Crushing margins have been guided to more modest percentages as Brazil floods China with soybeans after its port congestion clears.

The operating environment remains challenging for 2H13.

OCBC maintains its HOLD call and target price S$3.33, up from S$3.25.

Key financial ratios
Key ratios
The ticks and crosses below indicate whether the stock meets the following value investing criteria.
Price-book: 1.11x - "Price is what you pay, value is what you get" - Are you getting more than you pay for?
Yield: 2.01% - Does the stock pay a risk premium over fixed deposit rates?
Cashflow: S$103.26 mln - "Profit is opinion, cash is fact" - Is the company generating cash?
Total cash & equivalents: S$1.22 bln - Does the company have cash?
Source: Reuters
Management: Wilmar International Ltd was ranked 145th in the Governance & Transparency Index, with a score of 45 points.

Major shareholder(s):
18.36% - Kuok Brothers Sdn Bhd
18.33% - PPB Group Berhad
16.37% - Archer Daniels Midland Company
11.99% - Kuok Khoon Hong
10.25% - Martua Sitorus

Consensus recommendation
Analyst survey by Reuters
Consensus call: OUTPERFORM
Price target: S$2.42

Source/Extract/Excerpts/来源/转贴/摘录: InvestorCentral,
Publish date: 28/08/13

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