Share Price S$3.17
Target Price S$3.80
The sugar division will be the growth focus for Wilmar which is targeting new emerging markets Africa and Indochina. Growth from the sugar division is expected to outshine soybean crushing operations in China, which are still in overcapacity and putting pressure on margins. Palm operations should perform in line with expectation with the upstream affected by lower ASP and downstream driven by volume growth. Maintain BUY. Target price: S$3.80.
• The key takeaway from our recent meeting with management is that sugar will be the growth focus for Wilmar with its recent acquisition in Africa and expansion into new emerging markets in Indochina. The growth in the sugar division will cushion the volatility from the soybean crushing division, which is seeing declining contribution to group pre-tax profit (PBT) (2011: 20.3% of PBT, 2013F: 11.7%)
• From our recent meeting with management and noting the developments in the key industries, we conclude that:
a) The sugar division will do well as crushing volume is ahead of schedule while early harvesting allows farmers to replant affected areas to minimise the low yield impact in next year’s harvest. 3Q13 will see stronger yoy contribution in volume and margins.
b) Palm & lauric margin continues to do well despite rising competition in Indonesia, thanks to the integrated processing and good margins from its niche products.
c) Soybean crushing margin is still a challenge despite industry data showing positive back-to-back margins since late-Aug 13. Wilmar tends not to benefit much from rising soybean prices as its soybean purchases are mostly hedged when orders are made.
• Good growth from sugar. Key developments point to good contribution from the sugar division (expect 10.6% contribution to 2013F PBT, up from 6.0% for 2012).
a) Marginal adjustment to sugar production in Australia, confirming a marginal impact from the Yellow Canopy Syndrome. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) makes only a 6.4% cut in 2013/14 sugar production to 4.25m tonnes vs its earlier forecast of 4.541m tones (on 18 Jun 13).
b) Crushing ahead of schedule will lead to higher sugar milling contribution in 3Q13 while early harvesting allows farmers to replant affected areas to minimise the low yield impact in next year’s harvest.
• Palm downstream margin supported by integration and niche production. We had earlier highlighted that Indonesian refining margins have shrunk significantly due to rising competition from new capacities, leading to higher feedstock prices and lower refining product prices. Wilmar’s downstream operations are one of the most complete, making it cost efficient, while its ability to customise products to meet customers’ requirements builds up strong customer relationships and hence, it can command better margins. Thus, for 1H13, Wilmar continued to surprise the market with its refining pre-tax margin of >US$30/tonne. For 2013, we expect a pre-tax margin of US$33/tonne (2012: US$33.4/tonne).
• Beneficiary of biodiesel policies in Malaysia and Indonesia. Both Indonesia and Malaysia have announced plans to increase the usage of biodiesel blend to boost domestic demand for palm oil. Wilmar has an annual biodiesel capacity of slightly above 2m tonnes (or 8% of its palm processing capacity). Wilmar has only one plant in Malaysia with an annual capacity of 100,000 tonnes focusing on export markets, and its Indonesian plants house the balance, and supply both domestically and to overseas at good pricing.
• Soybean crushing margin not benefitting from rising soybean prices. China’s crushing margin turned positive towards end-Aug 13 (refer to line chart), but Wilmar’s soybean pre-tax margin is unlikely to follow a similar trend. Its thin soybean crushing margin is likely to stay at US$3-5/tonne for 3Q13. Smaller competitors are getting positive back-toback margins as soybean prices trend upwards after the US revised down soybean production. The soybean delivered in 3Q13 was mostly ordered much earlier before prices increased and shipments were delayed due to port congestion in South America. With the soybean arrival, soybean prices are trading higher, which expanded crushing margins. But as the largest crusher, Wilmar would have hedged its position upon making its soybean purchase orders and thus will not enjoy the additional margins which smaller competitors are enjoying now. However, this is not a big concern and we believe Wilmar will still deliver marginal pre-tax margin in 3Q13.
• We are 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-the-parts (SOTP) method, implying blended PE of 14.0x 2013F and 12.1x 2014F PE.
Share Price Catalyst
• A strong turning point in China’s soybean crushing market brought about by increased utilisation¸ which will deliver sustainable margins.
• Weather disruption affecting global oilseed, palm oil and sugar supplies, leading to stronger prices.
Publish date: 01/10/13