Wilmar

Kim Eng on 28 Feb 2012

Below par. Wilmar’s stock price has taken quite a beating following the recent release of its FY11 numbers, which came in below market expectations. However, its full-year net profit of US$1.6b was slightly ahead of our forecast of US$1.56b, and slightly below if biological gains and non-operating items were excluded. Net of these, net profit was US$1.52b. With variances in margins the norm going forward, earnings multiples are simply not commensurate with this risk. We maintain our Sell recommendation and target price of $4.50.

Weakness across the board. Volumes across all divisions were hit by weaker demand while ASPs were not appreciably higher. While FY11 turnover was up by 47% YoY, 4Q11 saw specific weakness as revenue marked a 20% QoQ decline. Sales volume for palm & laurics was the worst affected due to lower demand from Europe and India. In terms of pretax earnings, the oilseeds & grains segment posted a spectacular decline – eking out just US$1.7m in 4Q11 versus US$99.7m in 3Q11 – due to weak crush margins and overcapacity in China. For plantations and palm oil mills, Wilmar’s internal production was hurt by lower yields in 4Q11, thus increasing reliance on external CPO purchases at thinner margins. Also sub-par were contributions from the sugar division.

Earnings profile risky. We are leaving our forecasts for Wilmar intact, which implies flat earnings. We have had a negative view on Wilmar since November last year. With earnings volatility clearly evident over several reporting periods, we think Wilmar is not very different from a commodities trader whose earnings and margins get eroded if demand recedes or if it gets squeezed on its purchasing. In our opinion, the market needs to take this factor into consideration.

Maintain Sell. Given the ongoing price risk, the consensus estimate of US$1.74b earnings for FY12 appears risky to us. Our expectation is for earnings to remain flat at US$1.59b. Consequently, Wilmar’s FY12 PER of 17x looks unjustified. We reiterate our Sell recommendation and target price of $4.50, which is based on a more realistic 15x FY12 PER.