Wilmar International Limited

OCBC on 18 Sept 2012

Wilmar International Limited (WIL) bought back some 7.4m shares at S$3 each on 13 Sep (mandate to buy up to 10% of issued shares). Also buoyed by recent QE3 initiatives, the share price rebounded some 10% over the past two sessions. However, we are still not convinced that there is a structural improvement in WIL’s near-term fundamentals. Nevertheless, we note that the market is adopting a more risk-on approach on the back of QE3. Hence we raise our valuation peg from 12.5x to 13.5x, which sees our fair value edging up from S$2.90 to S$3.06 (still based on blended FY12/13F EPS). But as the fundamental outlook is still rather muted, we maintain HOLD; and investors may consider taking profit around S$3.40 or higher.

Initiates share buyback
Wilmar International Limited (WIL) has started to buy back its own shares (has mandate to buy up to 10% of its existing shares). The company on 13 Sep bought back 7.4m shares at S$3 each, or 0.115% of existing shares, for S$22.2m. And also buoyed by the recent QE3 initiatives announced by the US Federal Reserve, the share price has staged a strong rebound, climbing as much as 10% over the past two sessions.

China crush margins still sub-optimal
However, we are still not convinced that there is a structural improvement in WIL’s near-term fundamentals. First, crush margins in China for its Oilseeds business continue to remain sub-optimal, as the industry is still flushed with excess crushing capacity. Management also previously said that it only expects the surplus crushing capacity to be fully absorbed in 2014. And we think this is further exacerbated by the still-volatile movements in soy and other raw material prices.

Likely limited room for price hikes
Secondly, we think that its cooking oil products could continue to face price freeze even as China acts to further stimulate the domestic economy, given growing unemployment and inflationary concerns. According to media reports, the Chinese government continues to monitor rising soymeal and cooking oil prices closely; even meeting with some major crushers, including WIL and Cofco Group, to express concerns about soymeal prices and “excessive speculation” on them . As such, cooking oil makers like WIL could face margin compression due to rising input prices.

Higher risk-on approach but…
Nevertheless, we note that the market is adopting a more risk-on approach on the back of QE3. Hence we raise our valuation peg from 12.5x to 13.5x, which sees our fair value edging up from S$2.90 to S$3.06 (still based on blended FY12/13F EPS). But as the fundamental outlook is still rather muted, we maintain HOLD; and investors may consider taking profit around S$3.40 or higher.