Wilmar International (KimEng)

Event:

Wilmar’s share price has been range-bound over the course of the year, with no significant catalysts to drive it one way or the other. The stock was significantly de-rated late last year due to a weak run of quarterly earnings. While its earnings profile has seemed to stabilise, we do not see any positive earnings drivers on the horizon. Hence, we maintain our HOLD rating and target price of $5.31.

Our View:

Soft commodity prices have been on the slide over the past two months, in line with the broader economic climate, but are now showing signs of a pickup. On average, CPO and soybean prices are currently trending below our full-year assumptions, and this is a positive for Wilmar, as it is a net buyer of these commodities for its downstream production.

In the last reported quarter, soybean crushing margins had shown some improvement and we expect this trend to continue. However, the operating environment remains difficult with muted sales volumes. While average selling prices did show some improvement, price caps on cooking oil are still in place, thus limiting upside despite lower input costs.

On the acquisition front, Wilmar has also been uncharacteristically quiet, with only a small A$115m purchase in the past few months. Early last month, its Australian sugar subsidiary Sucrogen acquired Proserpine Mill to increase its sugar milling capacity from 15m tonnes to 17m tonnes, and raise overall raw sugar production by 10%, or 2.2m tonnes. Wilmar controls about half of Australia’s total raw sugar supply.

Wilmar’s plans to establish sugar plantations in West Papua are also progressing slower than our initial expectations, due to administrative issues. We have not yet factored any near-term contributions from this into our forecasts.

Action & Recommendation

We caution that the recovery in Wilmar’s oilseeds and grains business is still shaky. Using a 15x multiple on FY11 forecasts, our target price stands at $5.31. Although the US dollar has stabilised, the earnings multiple valuation also makes the stock susceptible to a depreciating greenback, as Wilmar reports in US$. Maintain HOLD.