We like Wilmar as we believe that investors have overlooked the potential of the group's strong integrated agribusiness model, due to concerns over weak crushing margins in China and rising refining capacities in Indonesia.
The stock's attractive P/BV of 1.2x, vs. the historical average of 1.9x, suggests that investors have priced in all these concerns but not the potential of its investments in sugar, flour, rice and downstream facilities. Under our new rating structure, our call changes from Outperform to Add. We maintain our SOP-based target price, with recovering earnings as the key rerating catalyst.
Resilient earnings model
The group reported a 24% jump in 9M13 core net profit, even though it continues to face challenging operating environments for some of its key divisions and weaker CPO selling prices. We believe this demonstrated that the group's business model is more resilient than its peers. Also, Wilmar successfully notched up a 6% improvement in its 9M13 palm and laurics PBT margin and was relatively unaffected by the sharp decline in the industry's refining margins due to additional new refining capacities in Indonesia. This achievement is testimony that the group's large integrated palm oil facilities and its venture into value-added downstream facilities have enabled it to withstand headwinds cause by higher refining capacities.
Key profit drivers for 2014
We expect Wilmar's net profit to grow by 11% in 2014, driven mainly by higher oilseeds and grains, plantations and sugar contributions. We project better margins for the oilseeds and grains division as we believe the poor 2012 margins have led some industry players to scale down their expansion plans or operations. Plantation earnings will benefit from higher CPO price, while the sugar division will gain from higher merchandising activities.
Beneficiary of Indonesia's higher biodiesel mandate
As Indonesia’s largest biodiesel producer, Wilmar stands to gain from the government's move to raise the biodiesel mandate to 10%, through higher domestic biodiesel demand. This will help to offset weaker biodiesel exports to the EU, following EU decision to impose anti-dumping duties on biodiesel producers in Indonesia.
Publish date: 02/12/13