Published February 10, 2009

Wilmar risks selling bout

But bigger free float will lift its weighting in MSCI index and STI, say analysts

By CHEW XIANG

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WILMAR International's decision last week to streamline its shareholding structure to almost double its free float is likely to boost its weighting in stock indices but could induce short-term selling pressure, analysts reckon.

Feeding forecasts: Analysts expect Wilmar's earnings to fall this year, with DBS Vickers slashing its profit estimate by 38% on softer demand from China

Goldman Sachs and Credit Suisse say the bigger free float will lift Wilmar's weighting in the MSCI Singapore index from 2.1 to about 3.7 per cent. And Credit Suisse says its weighting in the Straits Times Index could jump from 2.9 to 4.3 per cent.

The agri-business giant said on Wednesday that its holding company will be liquidated and the shares distributed to ultimate shareholders over the next 18 months. It said its free float could jump from 13.7 to 24.1 per cent.

CIMB analyst Ivy Ng is 'not too surprised by this move, as the holding companies no longer serve their purpose following the injection of related-party assets into Wilmar'.

But in the short term, the announcement could heap selling pressure on the stock. Goldman Sachs analyst Patrick Tiah says the uncertain timing of the share distribution, coupled with Wilmar's significant stock price out-performance in the past three months, could prompt investors to start cashing in.

But Ms Ng says: 'Concerns of a potential short-term share overhang will be offset by potential improvements of the stock's weighting in the MSCI index.' She is maintaining an out-perform call on the stock, with target price of $2.95.

In a report on Friday, DBS Vickers downgraded the stock to 'fully valued'. Analyst Ben Santoso says the biggest risk to Wilmar's outlook is softer Chinese demand this year. He slashed his 2009 earnings estimate 38 per cent to US$987 million, from a predicted US$1.58 billion for 2008, with a 12-month target price of $2.50.

Mr Santoso reckons Wilmar's position as a supplier of roughly a quarter of China's soybean needs makes it vulnerable to a slowdown in demand for animal feed, which is cutting soybean meal prices and crushing margins. Merchandising and processing earnings could fall by half this year, he predicts.

Credit Suisse analyst Tan Ting Min also expected 2009 net profit to fall by roughly a quarter to just over US$1 billion, from estimated 2008 earnings of US$1.36 billion. However, as most of Wilmar's profits are from downstream operations, earnings volatility should be reduced, and it is also trading at slight price-earnings discounts to other listed plantation players such as IOI Corp and KL Kepong.

CIMB's Ms Ng also sees a substantial fall in 2009 earnings to about US$874 million, from an estimated US$1.3 billion this year. This is likely to be due to a sharp fall in revenue to the 2007 level, or around US$17 billion. Earnings and sales are expected to pick up in 2010.

Analysts' consensus estimates are for a 12-month target price of $3.22, 11 cents or 3.4 per cent above the stock's closing price on Friday of $3.11 - its highest level in a month. The counter climbed 16 cents, or 5.4 per cent on Friday. It traded unchanged yesterday.