Wilmar International (DBSVikcers)

BUY; S$5.33; Price Target : 12-Month S$6.25

Surogen proposes to buy sugar mill assets in Australia

Wilmar announced that its Australian based sugar subsidiary, Sucrogen has entered into an agreement with Proserpine Co-operative Sugar Milling Association Limited (PCSMA) to purchase the business assets of PCSMA (ie the sugar mill), on a debt free and cash free basis for A$115m.

PSCMA is a sugar mill co-operative and is Australia's 5th largest raw sugar mill with crushing capacity of 2m MT of cane. Post the acquisition of PSCMA's sugar assets (ie sugar mill), Sucrogen's milling capacity will increase to 17m MT with raw sugar production rising by about 10% to 2.2m MT.

The acquisition of PSCMA's assets is subject to approval by PCSMA members (meeting expected to be held in late July 2011) and approval by the Australian Competition and Consumer Commission (ACCC).

A key success factor in sugar is economies of scale. Consequently we are positive on the deal as it enhances Sucrogen's operating capabilities. Furthermore, the proposed deal enhances Sucrogen’s position in the Mackay central region (Queensland, Australia) where there is significant potential for an expansion in cane growing.

We are not revising our numbers at this point in time as the deal is still subject to agreement by Proserpine members and ACCC approval. We note that Sucrogen produces almost half of Australia's total raw sugar supply which may be a point of contention for the competition authorities in Australia.

As this transaction highlights the growth platform that Wilmar is developing in sugar, we reiterate our Buy call on the counter.

Proserpine Co-operative Sugar Milling Association Limited

Proserpine Co-operative Sugar Milling Association Limited (PSCMA) is a sugar mill co-operative, wholly owned by 214 sugarcane suppliers and is Australia's 5th largest raw sugar mill with crushing capacity of 2m MT of cane. The mill currently crushes 1.7m of cane producing 250k MT of sugar and other by products such as molasses and electricity.

According to PSCMA’s website all of the raw sugar produced by the mill each year is exported. Marketing of the sugar is undertaken by Queensland Sugar Limited (owned by Sucrogen) who is also responsible for pricing of a significant quantity of the sugar.

We understand there is an opportunity to process the raw sugar from the PSCMA mill in Sucrogen’s refineries extracting more value out of the sugar.

Based on the FY09/10 annual report (year ended 28 February 2010), PSCMA has been affected over the last few years by a decline in the area designated for cane growing and adverse weather conditions.

Sucrogen overview

Sucrogen was acquired by Wilmar in 2010 for an enterprise value of A$1.75bn. The business is Australia’s largest raw sugar producer and is the second largest exporter of raw sugar globally through Queensland Sugar Limited. Sucrogen currently owns and operates seven sugar mills in North and Central Queensland, Australia, producing almost half of Australia’s total raw sugar supply (c. 2m MT). Crushing capacity stands at 15m MT with refining capacity of 970k MT.