Wilmar International - Immunity against lower prices

We remain positive on Wilmar’s 2H15 prospects following the group’s expectations of positive soybean crush margins and sugar contributions, as well as higher palm oil sales volumes and consumer products earnings. On top of these, we expect the group’s biodiesel division to benefit from the recently-approved CPO levy to partly fund the biodiesel mandates in Indonesia as this could boost its biodiesel sales volumes and the downstream processing margins for its palm products in the country. The group has also indicated that commodity prices may stay weak due to slower consumption growth and weaker currencies of major agricultural producers. We keep our earnings forecasts, Hold rating and SOP-based target price unchanged. While the stock is attractive at only 0.9x P/BV, it lacks strong catalysts.

What Happened 
The main takeaways for us from Wilmar’s 2Q15 results briefing are:

(1) its crush margin improved on lower soybean imports by financial traders, and the margin is expected to stay positive in 2H;

(2) the consumer products segment is expected to do well in 2H thanks to lower feedstock costs;

(3) tropical oils sales volumes fell 3.5% in 1H due to lower biodiesel sales volumes;

(4) its palm processing business will benefit from the export levy differential of US$20-30 per tonne between CPO and processed palm products in Indonesia in 2H;

(5) the sugar division is expected to deliver positive earnings in 2H;

(6) commodity prices could remain low in view of slower demand growth;

(7) China consumed less palm oil in 1H15 due to the narrowing CPO price discount against other edible oils;

(8) Indonesia’s biodiesel programme will be supportive of CPO prices; and

(9) Pertamina could call for a biodiesel tender in Sept.

What We Think
Wilmar’s earnings are more immune to the slump in commodity prices compared to its peers, which are in the upstream business, due to its more integrated business model. This is evidenced by the group’s stronger 1H15 earnings. In the 2H, the group’s earnings are set to benefit from higher biodiesel sales, positive sugar contributions and improved margins for its consumer products division. We are maintaining our earnings forecasts that project a stronger 2H15 net profit of US$698m vs. 1H15’s US$457m.

Technical Analysis
Daily Chart
What You Should Do
We continue to advocate a Hold due to limited upside from the current level. We would turn more positive on the stock when we see signs of significant improvement in the operating environment for its tropical oils and crushing business in China which is currently plagued by overcapacity issues. (Read Report)

Source : CIMB Research

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