Wilmar:Best trader relative to peers;maintaining Hold
Lowering target price to S$3.20to reflect earnings cut; risks
The absence of Indonesia biodiesel volume in April and May 2017, coupledwith poor timing in oil purchases (which led to expensive feedstock forconsumer products), were the main causes of the weak results. 2Q17coreprofit dropped 88% YoY to US$37m. WIL’s business is still in the process oftransforming into a more defensive model. In the meantime, it facesheadwinds from overcapacity in China and Indonesia. Thankfully, WIL hasequity investment, which has appreciated in value by nearly 1x.
Reducing profit forecasts by 13-14% for FY17-19E
We reduced the palm & lauric profit before tax (PBT) margins for FY17-19E by13% to US$13/mt, oilseeds & grains by 7% to US$14/mt and consumer packby 42% to US$35/mt. Prospects for these margins are fluid againstdevelopment of trade flows and the weather. However, WIL has stated that itis cautiously optimistic about 2H17performance. Most of its expensivefeedstock for consumer packs have been used.
Our target price is based on blended 14x FY17E EPS, mean valuations. Weassign 10x PE to the trading business, 15x to plantations and 18x to consumer.Upside risks: trading gains from other divisions; supportive governmentincentives; and lower capacities – oilseed crushing in China/palm oil refining inIndonesia. Downside: more trading woes.
Wilmar (WIL) shocked the market with another weak quarter of US$37m coreprofit, bringing 1H17core profit to 29% of the FY17expectation. Comparingagainst its trading peers, WIL stands out as the most well managed. However,investors' interest in traders have waned and is unlikely to return until the nextbull agriculture cycle. Strategic investors like ADM have invested constantly atthe S$3level, offering downside support. We maintain Hold.
Low predictability causing expectations to be constantly wrong
2Q17brings WIL to lower end of share price trading range