Rating: Neutral (price target: S$3.55
Wilmar is a diversified and vertically integrated soft commodity producer and trader. For earnings growth to resume, we believe the key drivers need to be the oilseed and grains division, and the plantations and palm mills division. We expect crush margins to remain low, which will likely lead to flat earnings from the oilseed and grains division. We are also a little concerned about medium- to long-term CPO pricing, which could weigh on the plantations division’s earnings.
Wilmar’s plantations and palm mills division owns around 240,000Ha of palm oil plantations, predominantly in Indonesia, and produces around 1mtpa of crude palm oil from owned plantations, plus around 1mtpa of palm oil from third party acquisitions of fresh fruit bunches. In 2012 the crude palm oil price averaged US$940/t; however, strong supply and slightly weak demand in 2013 has resulted in price declines this year, averaging around US$760/t YTD. Weak CPO pricing is weighing on Wilmar’s earnings for 2013, and we remain a little cautious on CPO pricing into 2014. There has been significant investment in new palm plantations, mainly in Indonesia, and we believe strong supply may keep a cap on CPO prices on a one- to three-year view.
We also remain slightly cautious on crush margins in the oilseeds and grains division. The division performed well in Q313, as crush margins expanded as a result of a lack of supply of feedstock; however, we believe ongoing excess crushing capacity in China is likely to keep crush margins weak for some time.
The palm and laurics division accounts for around 47% of Wilmar’s earnings. Volume growth has driven earnings over the past few years. We forecast 2% revenue growth at the division, although we expect earnings from the division to be flat as margins fall slightly.
Although not our base case, a potential upside catalyst for Wilmar revolves around the palm oil price. There is potential for the Indonesian government to increase the biodiesel blending requirements from 5% to 10%, which could create a one-off step change in global demand for palm oil. This could lead to an increase in CPO pricing, boosting Wilmar’s earnings.
We value Wilmar using a DCF valuation, applying a WACC of 9.8% and a terminal growth rate of 3%. We value our commodity trading coverage universe using a DCF
methodology as we believe this reduces the volatility in valuations that can result from multiple-based valuation methodologies.