DBS, RHB and OCBC are upgrading this palm plantation stock

DBS says Wilmar’s share price is trading at a bargain, having corrected by 25% in 2017. It is currently trading at 12.1 times FY18 earnings, lower than its five-year average multiple of 14.6 times.

"Our higher target price is derived from our revised FY18 and FY19 earnings forecast by 10% and 16%, on better margins outlook in its oil seeds and grains segment supported by soy crushing margins in China," says analyst William Simadiputr. Improving cost management will also help keep profitability of tropical oils in check.

"Our target price offers 20% upside from the last close of $3.06 and about 3% dividend yield for FY18." adds Simadiputr.

At the current price, Simadiputr believes that the market has fully priced in concerns over earnings fluctuation in its tropical oils as well as oil seeds and grains segments, due to commodity prices and supply chain congestion.

However, the analyst is of the view that the market is underestimating the ROE improvement potential on a stronger margin outlook. In the longer term, with a greater presence in India (through Adani-Wilmar’s proposed JV with Ruchi), and gradual penetration of well-established brands – including Goodman Fielder – in China.

Beyond earnings performance: Catalyst from China operations' listings. Possible IPO plans (A-share listing) for its China operations may drive its share price closer to its potential listing date. Wilmar is expected to file for an IPO in 1H19, at the earliest.

"We note that the China operations contribute to about 60% of Wilmar’s pretax profits," says the analyst.

Meanwhile, RHB is raising its earnings forecasts by 1-2% on the back of improved crush margins sand higher contributions from the sugar segment.

In a Monday report, analyst Juliana Cai recalls that the group’s FY17 core profit came in line with RHB’s expectations, with a bigger hongbao for its investors with higher dividend of 7 cents to celebrate the Lunar New Year.

Declining fresh fruit bunches (FFB) production yield in 4Q was the result of poor weather conditions so, Cai expects slightly higher plantation earnings this year as FFB production normalises.

She also anticipates better performance from the sugar segment after it registered a loss of US$25 million in the past year due to the timing effect from the new Australia sugar marketing programme, which deferred a proportion of the group’s sales to 1H18.

“Merchandising and processing also had a weaker trading performance. We expect 2018 to see a one-off uptick in sugar milling results due to the timing effect of the marketing programme. Merchandising and processing should also register better results if the trading performance normalises,” says Cai.

“Nonetheless, we caution that the high volatilities in the international soybean prices present big risks and advise investors to track this closely,” she adds.

OCBC is upgrading Wilmar given robust FY17 results, FY16 dividend of 10 cents and price correction since its last report.

OCBC analyst Low Pei Han says Wilmar's net profit of US$1.2 billion ($1.6 billion) was better "than ours and the street’s expectations", as the research house was forecasting US$1.09 billion while Bloomberg’s consensus was US$1.06 billion.

Low says she likes Wilmar’s integrated business model and well-diversified operations, and the group expects to continue to achieve sustained growth.

"The internal restructuring of operations for the proposed listing of its China business is now largely completed," says Low, "Should it be successfully executed, this should provide a catalyst for the stock."

Wilmar has declared a final dividend of 7 cents/share, bringing full year dividends to 10 cents/share. This is 54% higher compared to 6.5 cents/share in FY16 and represents a dividend payout of about 39% for FY17.

"We maintain our fair value estimate of $3.51, based on 13.5 times blended FY18/19 earnings," adds the analyst.

As at 10.48am, shares in Wilmar are trading 7 cents higher at $3.20 or 2.7 times FY18 book by RHB.