Wilmar International

Maybank Kim Eng Research, Oct 2

WE continue to like Wilmar for its fully integrated and well-diversified agri-business model, dominant global market positions in palm oil plantation/processing and soya bean crushing, as well as its foothold in China and India, two of the most important consumer markets in the world.

We see three key catalysts for the stock: (1) margin stabilisation in the Oilseeds & Grains (O&G) division, (2) low crude palm oil (CPO) price environment and (3) structural improvement to group ROA on rationalised asset allocation. We thus argue that the stock's current deep valuation discount to its historical mean is too excessive and reiterate our "buy" call with a target price S$4.52, implying 42 per cent upside from the current levels.

The O&G division is the biggest swing factor affecting Wilmar. In fact, much of the group's earnings volatility in the past could be traced to this division because of the poor and unstable soya bean crushing margins. Nevertheless, we believe things are changing. For one, the O&G division has recorded four consecutive quarters of positive PBT margin and we expect this momentum to persist as the overall size of soya bean financing in China shrinks.

By positioning itself as a mid-to-downstream player rather than as an upstream plantation company, Wilmar is well placed to benefit from the end of the commodity supercycle. Historically, the group was always able to deliver higher margins when feedstock prices, in particular CPO prices, were low. We believe it would continue to enjoy good margins for the next three years as we expect CPO price to remain flat.

In our view, one of the issues dogging Wilmar in the past was that it did not allocate its resources in a consistent manner to the divisional returns. For example, the largest allocation, around 30 per cent of the group's total assets, went to the O&G division, which was invariably the worst performer in terms of asset returns. However, with much of the investment in this division completed in 2010, we believe more resources will henceforth be deployed to the Palm & Laurics, Sugar and Consumer Products divisions, which yield higher return on assets (ROA). Over time, this should raise the proportion of high-return assets in Wilmar's portfolio and hence, lift group ROA.

BUY