Wilmar International Ltd (CIMB)

OUTPERFORM Maintained
S$5.30 Target: S$6.20
Mkt.Cap: S$33,664m/US$27,358m
Palm Oil

China scraps price controls for cooking oils

Price controls in China lifted
According to Reuters, China has lifted price caps for retail vegetable oils. The removal is a nice surprise and could boost the profitability of Wilmar’s consumer products division in 2H11. This is because Wilmar would now be able to raise the retail prices of its packaged cooking oils to pass on higher feedstock costs and restore its profit margins. There is no change to our earnings forecasts pending confirmation of this news. We estimate that for every US$10/tonne increase in pretax margins for the consumer products division, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact. Also intact is our target price of S$6.20, based on 16x forward P/E and Outperform rating. Potential re-rating catalysts are this news and stronger-than-expected earnings.

The news
China has lifted price caps for retail vegetable oils, according to Reuters, citing unidentified industry sources. A call to the Ministry of Commerce by Bloomberg had not been answered.

Comments
We are yet unable to verify this news with the company. The removal of the price caps should be positive for Wilmar, allowing it to raise its cooking-oil prices and restore profit margins for this division. Wilmar has not raised the prices of its branded cooking oil products since Oct 10 due to the price caps.

Wilmar is the largest owner of branded packaged edible oils in China, with about 45% share of the branded edible oils market in China in 2010. It derived 11% and 9% of its pretax profits from its consumer packs division (which comprises mainly branded cooking oil sales in China) in 2009 and 2010, respectively.

Pretax margins for this division had been pinched by price controls in 2008 and since 4Q10. Since Dec 10, the Chinese government had been restraining cooking-oil producers from raising their cooking-oil prices as part of its efforts to address inflation. To provide relief to the producers from rising feedstock costs, the government had been selling state reserves of soybeans to these producers at below international market prices. It is yet unclear whether the producers would be required to obtain government approval for raising their cooking-oil prices following this lifting.

Valuation and recommendation
Upside to earnings. Back in 1H08 when the government had slapped price controls on cooking oil, PBT margins for Wilmar’s consumer products division fell to a low of US$18/tonne against a 2009 pretax margin of US$70.60. We have conservatively assumed that pretax margins would average US$22/tonne for this division in 2011.For every US$10/tonne increase in pretax margins here, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact.
Maintain Outperform. We are maintaining our profit forecasts for FY11-13 and target price of S$6.20, based on 16x forward P/E, a 10% premium to our market P/E target, pending clarification from management. We had turned positive on the group recently, convinced that the worst is over and that its 1Q strength is sustainable in light of softening feedstock prices, lower cost of soybeans from the Chinese government in 2Q, stronger sales volumes in the upcoming quarter as well as strong profit contributions from Sucrogen in 2H.