SELL (unchange)
Price S$3.99
Target Price S$3.20
Investment Highlights
We maintain a Sell with an unchanged price target of S$3.20/share based on FY09F PE of 13x. Although we like Wilmar International Ltd (Wilmar) because of its integrated agribusiness model and global exposure, we believe that the agribusiness group would be affected by lower vegetable oil prices and uncertainties in the Chinese economy.
In a conference call last Friday, Wilmar said that the outlook of CPO prices would depend on energy prices and the weather in US in the next two to three weeks. If there is an early frost, then this would affect soybean crop and boost vegetable oil prices. Also, if crude oil were to sustain at present prices, then CPO (crude palm oil) prices would only fluctuate by a band of RM200/tonne from current levels.
Wilmar also said that at current CPO prices, its biodiesel plants, which have capacity of 1.1 million tonnes/year are operating at full capacity. Wilmar could be looking to expand its biodiesel capacity by another 50% going forward.
We have revised FY08F earnings forecast downwards by 4% to account for lower CPO price assumption of RM3,000/tonne versus RM3,500/tonne previously. We estimate that for every RM100/tonne decline in CPO price, Wilmar’s FY09F net profit would decrease by about 1%.
We are only adjusting our CPO price assumption for Wilmar’s FY08F earnings forecast as we believe that our assumptions for the other business divisions are already conservative enough.
Our pre-tax profit assumption for the palm and laurics merchandising division is US$25/tonne for FY08F versus US$28.60/tonne in 1HFY08. For the oilseeds and grains division, we have assumed pre-tax profit of US$45/tonne in FY08F against US$56.90/tonne achieved in 1HFY08.
To support demand and also to pass on cost savings from softer vegetable oil prices, Wilmar has reduced the selling prices of its consumer products by as much as 12% effective 14 August. It appears that Wilmar would not be implementing the 10% price hike approved by the authorities early this year.
FY08F EARNINGS REVISED DOWN BY 4%
Although we like Wilmar International Ltd (Wilmar) for its integrated agribusiness and global exposure, we are maintaining our SELL recommendation on the group as the outlook for CPO price is not as positive as before.
We have revised Wilmar’s FY08F net profit down by 4% to account for lower CPO price assumption of RM3,000/ tonne instead of RM3,500/tonne previously. According to Malaysian Palm Oil Board (MPOB) statistics, the average CPO price in the first seven months of the year was RM3,508/tonne compared to RM2,239/tonne in the same period last year.
We are not adjusting our assumptions for the rest of the divisions as we believe that the figures are already conservative enough.
Merchandising and processing of palm and laurics slowing down
The division performed well in 1HFY08 versus 1HFY07. Sales volume climbed 65.3% YoY to 9.3 million tonnes in 1HFY08 even as the average selling price surged 61.7% YoY to US$959/tonne.
However, as mentioned in an earlier report, sales volume remained flat QoQ when comparisons are made between 1QFY08 and 2QFY08. This indicates that the increase in selling prices in 2QFY08 had affected the demand for palm oil products.
In spite of this, pre-tax profit of the division climbed 11.2% QoQ from US$27.10/tonne in 1QFY08 to US$30.10/tonne in 2QFY08.
Oilseeds and grains processing division still doing well
This is due to healthy demand from the animal feed industry. In 2007, margins and sales volume were particularly weak as the hog industry was affected by the blue ear disease. Since then, the industry has recovered, as reflected in the strong sales volume and margins enjoyed by Wilmar’s oilseeds and grains division.
Pre-tax profit of the division surged nearly five-fold to US$56.90/tonne while sales volume expanded 47.2% YoY to 6.2 million tonnes in 1HFY08.
Selling prices for consumer products lowered by 12%
In line with the current downward trend in vegetable oil prices, Wilmar is lowering the average selling price of its cooking oil products by as much as 12%. This was effective 14 August.
The reduction in selling price should help shore up demand after sales volume shrank 20% QoQ to 694,000 tonnes in 2QFY08. The decline in the sales volume is in spite of flat selling prices in 2QFY08.
The stagnant selling prices coupled with higher raw material costs resulted in the pre-tax profit of the division weakening by 4.4% QoQ to US$17.60/tonne in 2QFY08.
Wilmar is one of the largest cooking oil manufacturers in China, with an estimated market share of 45% to 50%. The gr oup’s Arawana cooking oil is the official cooking oil for the current Beijing Olympics.
Plantation pre-tax margin deteriorated QoQ in 2QFY08
Wilmar’s plantation margins showed the same pattern as other plantation companies. Due to higher fertiliser costs, the division’s pre-tax margin shrank from 24% in 1QFY08 to 21% in 2QFY08.
Comparing 1HFY08 against 1HFY07, pre-tax profit of the division surged underpinned by full six months contribution from PPB Oil Palms. As a result, mature areas harvested rose 8% while CPO production jumped 64% YoY to 691,300 tonnes in 1HFY08.
In terms of operational palm efficiencies, FFB (fresh fruit bunches) yield improved to 10 tonnes/ha in 1HFY08 from 9.3 tonnes/ha in 1HFY07 while OER (oil extraction rate) was flat at 21.0%.
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