Wilmar

Kim Eng on 11 May 2012

Yet another shocker of a quarter. Wilmar’s 1Q12 results were significantly below expectations, with operating profit down 51% yoy to US$205.6m. This is against consensus expectations of single-digit profit growth this year. In recent quarters, despite healthy volume growth, Wilmar’s profitability has exhibited volatile swings, which we believe has dealt a blow to investor confidence.

This time its Oilseeds & Grains. These profit swings have originated mainly from the “Merchandising & Processing” segment, which comprises of Palm & Laurics and Oilseeds & Grains”. This quarter, the weakness came from Oilseeds & Grains which swung from a US$192m pre-tax profit to a US$53m pre-tax loss. This can be traced back to the continuing situation of overcapacity in China, with “poor timing of beans purchases” cited as well.

Trading traits. As we have argued earlier, although Wilmar is positioned as an upstream/ midstream commodity firm, a lot of profitability hinges on this segment, where profitability behaves very much like a trading firm with no real visibility. This is especially so in a period of volatile commodity prices, which should be taken into account. This is not helped by the situation in China, where we estimate the soybean crushing industry is only running at a utilization rate of 50%

Other divisions. The revised Indonesian export duty structure which came into effect in mid-September 2011 benefited its refineries in Indonesia but penalized its Malaysian refineries. Overall we expect neutral effects should the latter implement retaliatory tax rules. The consumer division grew pre-tax profit 37% yoy to US$50m, benefiting from price increases in China and the declining raw material prices, though this segment only accounted for 4% of Group profit last year.

Expect de-rating, earnings risk. We expect further de-rating of the stock as the market recognizes its trading traits as well as its relative lack of growth prospects in existing businesses given its dominant market shares. We also see earnings risk, as we had warned earlier. Our estimates are lowered by 10-15% and our TP lowered to $3.60 based on 14x FY12F (1x PEG). Maintain SELL.