Share price: SGD3.45
Target price: SGD4.30 (from SGD4.52)
Positive underlying momentum. While 3Q13 was in line, the positive underlying trends reinforce our BUY recommendation. The positives came from strong performances at the oilseeds & grains (O&G), and sugar milling divisions. We expect 4Q13 to remain strong thanks to recent rise in sugar price, stabilizing soybean crushing margin in China as well as our expectation that CPO price will stay low. We think consensus estimates of USD1.3b are conservative given that second half of the year is traditionally the operating peak season for Wilmar. This should allow the stock to be re-rated further. Our SGD4.30 revised TP is based on 14.2x FY14 EPS, a discount to its historical P/E average of 15.4x since January 2008.
Encouraging bottomline delivery. Although top line dropped 4.2% YoY due to low CPO price, net profit increased by 2.5% YoY for 3Q13 and by 22% YoY for 9M13. Wilmar has achieved USD950m net profit in 9M13.
O&G performance supports our investment theme. One of the reasons why we prefer Wilmar is we expect the soybean crushing margin in China to stabilize, which will reduce the earnings volatility for the whole group. 3Q13 supports our view and suggests room for better delivery ahead. O&G division delivered a PBT of USD54m, much higher than USD15m a quarter ago. This translates into a sharp improvement in PBT margin to 1.4% in 3Q13 from only 0.5% in 2Q13. In our view, the main driver for the margin recovery was the diminishing of soybean financing activities in China.
Sugar the next leg of growth; the positive signs have emerged. We believe Wilmar will deploy more resources to higher return areas going forward to improve group ROA. One of the beneficiaries is sugar, which is expected to contribute 17% to the group PBT. The Sugar Milling division delivered record highs revenue of USD640m and PBT of USD128m in 3Q13. PBT margin also improved significantly to 20%, the highest level since 1Q12. This strong performance is likely to stay in 4Q13 as sugar price remains at USD18-20cents/lb range.
We lower our margin assumption for the Palm & Laurics division. The Palm & Laurics division usually benefits from low CPO price. In 3Q13, PBT margin remained high at USD35/ton. We continue to believe that current low CPO price will benefit Wilmar but it seems that our previous margin forecast (USD38/ton) was a little too optimistic. Accordingly, we lower our margin forecast to USD34/ton, taking our FY13-15 forecasts lower by 2%.
Publish date: 08/11/13