SINGAPORE (April 11): DBS Vickers Securities is maintaining its forecasts for Wilmar International’s oilseed & grains pretax margin to average 1.9% this year from 1.4% in 2016. The research house is also keeping the counter at “hold” with a target price of $3.90, pending management guidance.
In a flash note on Tuesday, analyst Ben Santoso cites a Reuters article today that points to negative soybean processing in China, prompted by “precipitous declines in soybean oil prices” driven by higher vegetable oil imports; regular auctions of state rapeseed oil reserves; and the unwinding of speculative long positions in edible oil futures on China’s Dalian exchange.
Suggesting that China’s weak crush margins would adversely affect imports of palm oil into China, as the anticipated jump in soybean imports from April-June would likewise see “very big crushing volumes”, the article also mentioned talks of potential release of old-crop soybean reserves.
“Based on crush margin data compiled by Bloomberg, soybean crush margins in China have indeed declined steeply year-to-date. As of yesterday, the crush margin was reported to be negative CNY220/MT or approximately US$31.9/MT loss. This was a reversal from CNY93.6/MT profit or about US$13.6/MT at the end of February 2017,” adds Santoso.
According to the analyst, spot margin calculations had no direct correlation with Wilmar’s oilseeds & grains pretax margins.
In fact, he points out that the agribusiness group’s margins have at times “moved in opposite directions” as Wilmar’s feedstock costs and end-product selling prices are secured months ahead through back-to-back hedging.
While Wilmar may opt to increase or reduce its crushing volumes relative to other industry players, the group’s oilseeds & grains pretax also contain contributions from its consumer pack segment, which typically does not move in tandem with crush margins, he adds.
“In our view, the negative crush margins are a disincentive for Chinese soybean processors, and may prompt some to reduce crush volumes to reduce losses. However, to maintain price stability, any intended release of soybean reserves should eventually help processors by lowering feedstock costs,” says Santoso.
As at 4.44pm, shares of Wilmar are down by 2 cents at $3.50.
