Wilmar Int’l Ltd - Lower S$4.78 fair value on weaker China outlook (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$4.45

Fair Value: S$4.78

Massive sell-down in share price. Wilmar International Limited's (WIL) shares were sold down over the past two days, likely spooked by the looming specter of a hard landing for China's massive economy; although we note that experts remain mixed over the likelihood of such an event happening. Its share price has taken a tumble of 13% over the last two days; and it is also 36% off its 52-week high and down 21% YTD.

Looming specter of China hard landing. With the US economy looking to slide back into the doldrums and the EU debt crisis still seen as far from being resolved, investors have increasingly turned to China as the last bastion of growth. However, the latest economic numbers coming out of China are also not looking all that encouraging, with industrial production slowing for the third straight month in Aug. As China could face a more complicated environment for the rest of the year; the government expects the industrial value-added output to grow 13.5% this year. Meanwhile, we suspect the market could also be spooked by recent reports of the increase in small business failures in China, as it is unlikely that the country can escape the economic pain of its big customers.

Impact on WIL. As WIL derives 60% of its earnings from China in 1H11, any significant economic contraction would have an impact on its performance. We believe that its crushing business may be the most affected, due to the additional 12.3m tonnes of soy crushing capacity that China is reportedly adding this year to bring the country's total to some 100m tonnes1 ; China National Grain and Oils Information centre also expects utilization for this year to be around 55%. This suggests that there is still quite a lot of excess capacity in the industry. In addition, should consumption taper off sharply, the overall crushing margins will likely take a big hit (we incorporate a 40% chance of weaker margins in our FY12 numbers). On the other hand, we are less concerned with WIL's cooking oil business, given that raw material prices are easing and WIL has also managed to raise its ASPs by 5% in Aug.

Paring fair value to S$4.78. In line with the weaker overall market, as well as the more muted outlook for China, we are reducing our valuation peg from 16x to 12x (-1 standard deviation from its 4-year mean) and when applied against its FY12F EPS, we derive a new fair value of S$4.78. Given the limited upside, we maintain our HOLD rating.