Wilmar Int’l Ltd (OCBC)

Maintain HOLD
Previous Rating: HOLD
Current Price: S$5.26
Fair Value: S$5.68

Acquires more sugar assets in Australia

International Limited (WIL) has recently announced that its Australian-based subsidiary Sucrogen plans to acquire the business assets of Prosperpine Co-operative Sugar Milling Association (PCSMA) for A$115m (S$151m) on a "debt-free and cash-free" basis. WIL adds that the move will boost Sucrogen's milling capacity by 2m tonnes to 17m tonnes. It will also increase the sugar giant's raw sugar production by 10% to 2.2m tonnes. In addition, it will increase its presence in the Mackay central region, where it already has operations in raw sugar production, sugar refining, ethanol and liquid fertilizer production. The deal is subject to approval of PCSMA members - consisting of 214 sugarcane suppliers; and the Australian Competition and Consumer Commission (ACCC).

Good strategic fit… Overall, we think that the latest move would be a good strategic fit for Sucrogen. Besides increasing i ts c a pa c i t y, we n o t e t h a t t h e mo v e wi l l a l s o a d d t o i ts capabilities; this as PCSMA has recently invested in facilities to manufacture and market furfural, which is a globally traded industrial chemical used in solvent extraction, foundry resins and pharmaceuticals. Last but not least, Sucrogen believes that there is great potential in the region for expansion of the cane-growing area.

but no immediate boost expected. We note that we are unlikely to see any immediate boost, given that the deal may take some time to push through. WIL expects to only hold a postal ballot for the 214 members to vote in late July. And recall its previous Sucrogen acquisition, which took a much longer-than-expected time for the regulators to give their approval. Meanwhile, Sucrogen's own operations are expected to be back-end loaded due to seasonality. As such, WIL expects sugar milling to incur losses in the first half of the year (posted a 1Q11 pre-tax loss of US$7.2m); but remains confident that Sucrogen should be able to achieve an EBITDA target of US$100m for this year.

No change to estimates. Given that it may still take a while before the conclusion of the deal, we hold off adjusting our e s t i m a t e s f o r n o w. A n d w e e x p e c t W I L t o b e a b l e t o comfortably finance the acquisition with internal resources and debt. While we saw a bottoming out of WIL's consumer pack margins in 1Q11, we will continue to keep a close watch on the inflation story in China. Maintain HOLD with S$5.68 fair value. We would still be buyers closer to S$5.