Wilmar : Oilseeds Recovery; Palm Volumes (Citi)

Wilmar International
Price (04 Nov 13) S$3.40
Target price S$3.95
2H13’s Focus – Oilseeds Recovery; Palm Volumes

 3Q13 results Nov 7th—Wilmar is scheduled to report after market hours. In the past three years, 3Q has been equivalent to 20-32% of full-year profits. Investors are expected to focus on its oilseeds division (margin recovery) as well as its performance in the palm merchandising division (sustaining volume share, profitability).


 Blended oilseeds recovering vs. FY12—The oilseeds division has been a key challenge. Margins in this division, which hit a peak of US$71/t in 1Q08, had declined to –US$12/t in 1Q12, impacted by a supply glut in processing capacity (much of it in 2011/2012), inventory gains by unhedged competitors helped by rising soy bean prices, as well as commodity financing arbitrages in China. This division, which accounted for ~30% of its profit pool in the FY08/09 peak, declined to a mere 1% contribution rate in FY12. We expect this to recover back to the ~10% contribution range in FY13. Recovery trends have been seen for the last four quarters, though 2Q13’s oilseeds margin softened to US$3/t from 1Q13 US$10/t as the supply situation from constrained South American logistics normalized. Chinese soybean imports year-to-September have risen 3% YoY to 46m tons, modest versus 11% growth in 2012. We expect to see the industry work towards capacity digestion with few new additions, given that newer entrants are having poor return-oninvestment metrics – helping stabilize margins in 2H13 and into 2014.

 Palm merchandizing division the next focus—Volume growth for Wilmar’s palm merchandizing division in 1H13 was good +9% YoY, with margins of US$38/t (margins in the US$30-40/t range seen as strong), helped by Wilmar’s strong position in refining, oleochemicals and biodiesel. Wilmar has biodiesel capacity of 2mt (or ~8% of its palm processing capacity), spread across plants in Indonesia and Malaysia – thus Indonesia’s plans to intensify usage of biodiesel should help boost demand for Wilmar in 2H13. We are also keen to track if volume growth will be sustained in 2H13, especially on recent production data from Malaysia/Indonesia (see Fig 5) that indicate lower production on weather/biological trends as well as the division maintaining margins (> US$20/t) despite the industry’s capacity additions.

Investment strategy
We have a Buy rating on Wilmar for its integrated business model and strong management team. Positive catalysts for the stock include: a) the company's strong execution of its ex-China growth plans (especially in sugar in Indonesia); and b) its ability to scale its consumer division in China for higher-margin products.

Valuation
We value Wilmar at a target price of S$3.95, which is set at a PER of 14x average earnings over a 5-year cycle (2011-15E). We normalize earnings due to the typical volatility of a trading company, although we have seen some degree of normalization at Wilmar's key oilseeds unit. The 14x P/E is set at a 10% discount to the stock's mean of 16x considering the earnings volatility of the sector.

Risks
Downside risks to our target price include: 1) Trading risks from commodity prices and counterparty risks; 2) Lower-than-expected global CPO and soybean production; and 3) Slower end-demand levels for food & industrial products.

Source/Extract/Excerpts/来源/转贴/摘录: Citi-Research,
Publish date:05/11/13