Wilmar International Limited (WIL) fell some 3.8% yesterday to S$3.30, likely spooked by news that China’s inflation rate has rebounded to a 10-month high; this after consumer prices rose 3.2% YoY in Feb, driven by a 6% increase in food prices due to the Chinese New Year festivities. While the Chinese government is understandably hawkish about inflation, market watchers do not expect them to take any drastic measures such as tightening monetary policy or introducing price caps on essential food items, especially since the spike could be seasonal in nature. The stock has also corrected somewhat since we downgraded it to Hold, and as there is now a potential 18% upside to our unchanged S$3.90 fair value (still based on 15x FY13F EPS), we upgrade our call to BUY.
Spooked by rebound in China’s inflation rate
Wilmar International Limited (WIL) fell some 3.8% yesterday to S$3.30, likely spooked by news that China’s inflation rate has rebounded to a 10-month high; this after consumer prices rose 3.2% YoY in Feb, driven by a 6% increase in food prices due to the Chinese New Year festivities. Understandably, the Chinese government is still pretty hawkish with regards to inflation; and this has sparked some concerns over possible monetary tightening to keep a lid on inflation. We note that some quarters were also worried about potential price caps on essential food items such as rice, flour and cooking oil – these are some of the major food items that the company currently distributes in China.
Drastic measures unlikely for now
However, market watchers do not expect Beijing to tighten monetary policy just yet, as this may in turn hurt China’s growth. Recall that the economy grew by only 7.8% last year, in line with official guidance, but the slowest rise in 13 years. Nevertheless, it is fair to assume that some caution has crept back into the market. As for potential price caps, some market watchers are also of the view that there will not be any in the near term, as food prices are likely to edge lower in the coming months. In any case, the Food and Agriculture Organization (FAO) of the United Nations recently noted that global food prices were relatively stable in Feb; and the FAO Food Price Index has traded in a narrow 201-212 point range since Nov.
Upgrade to BUY
In view of the recent correction since we downgraded our call to Hold on 1 Mar, there is still a potential upside of 18% to our unchanged fair value of S$3.90 (based on 15x FY13F EPS). Hence, we upgrade our call to BUY. Over the longer term, we are also cautiously positive on the company’s expansion in Africa and potentially Myanmar.
Wilmar International Limited (WIL) fell some 3.8% yesterday to S$3.30, likely spooked by news that China’s inflation rate has rebounded to a 10-month high; this after consumer prices rose 3.2% YoY in Feb, driven by a 6% increase in food prices due to the Chinese New Year festivities. Understandably, the Chinese government is still pretty hawkish with regards to inflation; and this has sparked some concerns over possible monetary tightening to keep a lid on inflation. We note that some quarters were also worried about potential price caps on essential food items such as rice, flour and cooking oil – these are some of the major food items that the company currently distributes in China.
Drastic measures unlikely for now
However, market watchers do not expect Beijing to tighten monetary policy just yet, as this may in turn hurt China’s growth. Recall that the economy grew by only 7.8% last year, in line with official guidance, but the slowest rise in 13 years. Nevertheless, it is fair to assume that some caution has crept back into the market. As for potential price caps, some market watchers are also of the view that there will not be any in the near term, as food prices are likely to edge lower in the coming months. In any case, the Food and Agriculture Organization (FAO) of the United Nations recently noted that global food prices were relatively stable in Feb; and the FAO Food Price Index has traded in a narrow 201-212 point range since Nov.
Upgrade to BUY
In view of the recent correction since we downgraded our call to Hold on 1 Mar, there is still a potential upside of 18% to our unchanged fair value of S$3.90 (based on 15x FY13F EPS). Hence, we upgrade our call to BUY. Over the longer term, we are also cautiously positive on the company’s expansion in Africa and potentially Myanmar.
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