Wilmar International (WIL SP, NEUTRAL, FV SGD5.22, Last Price: SGD5.22)

We downgrade Wilmar from Buy to Neutral with a lower FV of SGD5.22 on the narrowing margins at two of its segments amid a tough operating environment.  While its 4Q results were disappointing, we believe what sparked off the crash in the stock price yesterday was the sharp decline in oilseed & grains profitability. This triggered fears of a repeat of Wilmar’s trading losses in 4QFY10 and 1QFY11. Meanwhile, expectations of huge gains in the palm & laurics segment also did not materialize. Although the stock has digested most of the damage, there is no catalyst for recovery in sight.

Below expectations.  Wilmar’s FY11 core earnings of USD1517.1m was below our forecast by 10.8% and below consensus by 8.9% owing to the tough overall operating environment.  Our FV is cut to SGD5.22 based on 18.0x reduced FY12 earnings.

Palm & laurics segment lacked spark. The palm & laurics segment fared badly as its profit margin shrank in 4Q to USD20.3 per tonne from USD29.2 in 3Q. The change in Indonesia’s export duty structure for palm oil benefited its Indonesian operation but hurt its Malaysia refinery. The full year margin of USD28.9 per tonne was below our expectation of USD35.0. We are trimming our margin assumption to USD30 from USD40 per tonne earlier, with our volume growth assumption maintained at 5%.

Oilseeds & grains segment again under pressure.  This segment came underpressure again as crush margin in China was thin. This was perhaps not surprising in view of ADM’s poor set of results announced earlier. Management does not think China’s soybean crushing margin will make any significant recovery this year given the structural oversupply in crushing capacity. We reduce our margin assumption from USD25 to USD10 per tone, raising our volume growth estimate to 15%. We doubt that Wilmar will run into sharp losses in this segment given the relatively stagnant prices.

Consumer products recovered in 4Q.  Following 7 months of price control in China, Wilmar enjoyed a price increase in August, resulting in this segment’s profits surging by 130.8% q-o-q. PBT per tonne increased to USD28.1 in 4Q, bringing the full year margin to USD19.4 per tonne compared with our expectation of USD25.0. As we are still optimistic that margin could improve further this year, we maintain our assumption of USD35 for 2012.

Plantation. The plantation segment performed as expected, with the core PBT of USD471.2m matching our previously lowered forecast of USD464.7m. FFB production growth was  strong at 21.6% for the year. We expect Wilmar’s FFB output to grow to 4.4m tonnes this year. No change in our segment forecasts.


Source: OSK188