Wilmar International - The renewable fuel boost (DBSVickers)

BUY S$5.56 STI : 3,084.24

Price Target : 12 months S$ 6.25

Reason for Report : 2Q11 results preview

Potential Catalyst: Removal of price cap in China

DBSV vs Consensus: FY12 below concensus due to lower CPO prices

• 2Q11 earnings expected to range US$360-391m

• FY11-13F earnings tweaked by -0.2% to +0.2% on new FX rates

• As at 1 Jul 11, Wilmar Bioenergi Indonesia is RFS2-registered renewable fuel producer. This should boost 2H11 earnings

• Buy call reiterated on 12% upside

Decelerating 2Q11. We expect Wilmar’s 2Q11 earnings to range US$360-391m (-6.9% to +1.1%q-o-q), premised on sequentially stronger plantations and palm & lauric M&P contribution, but partly offset by weaker oilseeds & grains margins and consumer segments. We based our analysis on spot crush and refining margins, which were employed as directional proxies.

FY11F-13F earnings revised. We adjusted Wilmar’s FY11F-13F earnings by -0.2 to +0.2%, to take into account stronger MYR, IDR and SGD in revised FX rates issued recently by DBS Bank. These changes thus involve lowering our long-term CPO prices in consequence, holding our crude oil price assumptions unchanged. Our DCF-derived TP is maintained at S$6.25.

More 2H11 boost from renewable fuel. Our recent visit to US Environmental Protection Agency (EPA) website revealed that Wilmar Bioenergi Indonesia has been a RFS2 registered renewable fuel producer since 1 Jul11. This means importers of renewable fuel produced at Wilmar’s registered renewable fuel production facilities may generate RINs (Renewable Identification Number). This bodes well for Wilmar’s 2H11 earnings outlook, in our view. Assuming 2H11 average WTI crude oil price of US$97/bbl, CPO price of RM2,900, CPO export tax of 12.5% and biodiesel excise tax credit of US$300/MT, we estimate gross profit of US$114/MT, excluding sales of by-products such as glycerine. At 100% utilisation, this equates to US$60m in 2H11 or c.4% boost from our current earnings forecast.

Buy call reiterated. We believe eventual removal of price cap in China, potential contribution from renewable fuel and higher volumes should boost the group’s 2H11 earnings and provide catalysts for the counter.