SINGAPORE (Aug 11): CIMB is maintaining its “add” on Wilmar International on expectations of stronger 2H earnings and its proposed plan to list its China operations, which will help the group to unlock value and act as a rerating catalyst, despite the weak 2Q17 results.
“The stock currently trades on a forward P/E of 14.7x and P/BV of 1x. Key risk to our view is lower-than-expected crush and refining margins as well as lower CPO and sugar prices. Maintain Add and SOP-based target price,” says analyst Ivy Ng Lee Fang.
Last night, Wilmar announced a 94% q-o-q decline in core net profit to US$37 million ($50.4 million), due mainly to weaker performances across all its key segments. Still, 2Q17 earnings were a significant improvement from 2Q16’s net loss, thanks to better performances from its oilseeds and grains unit.
See: Wilmar returns to profitability in 2Q with US$60.2 mil earnings
1H17 core net profit formed 31% of CIMB’s and 28% of consensus full-year forecasts. “We consider this broadly in line. Wilmar’s 1H core net profit has over the past five years accounted for 0.2-43% of its full-year core earnings,” says Ng.
The weak q-o-q performances were due to lower contributions from tropical oils and oilseeds and grains segments as well as higher losses from the sugar division. Oilseeds and grains recovered from one-off losses in 2Q16 but this was partially offset by weaker y-o-y results from tropical oils. The group attributed the weak 2Q earnings to a challenging operating conditions faced by the merchandising and processing businesses of tropical oils and sugar. As expected, the group announced an interim tax-exempt dividend of 3 cents/share.
The oilseeds and grains division was the largest earnings growth driver for the group in 2Q17 and 1H17. This division turned around to record a US$275 million pretax profit in 1H17 against a loss in 1H16 on the back of higher crush volume and positive crush margins. However, pretax profit from this division fell 71% q-o-q as pretax profit per tonne for this division fell 74% q-o-q to US$8 per tonne.
The tropical oils segment (plantations and palm oil processing) posted a 67% q-o-q and 68% y-o-y decline in 2Q17 PBT to US$60 million due to the challenging operating environment faced by its merchandising and processing business. This more than offset the 32% y-o-y rise in FFB output from its upstream estates in 2Q17. The sugar division also posted higher pretax losses of US$106.8 million in 2Q17 due to weaker performance from the sugar merchandising and refining division.
In its outlook, Wilmar expects its tropical oils division to perform better in 2H17 on the back of improvements in production yields and better margins from downstream operations. The group also indicated that oilseeds crush margins are expected to stay positive for the year and consumer products are set to improve as they enter seasonal peak period. However, the sugar business will continue to be affected by volatility in sugar prices.
As at 11.12am, shares in Wilmar are trading 16 cents lower at $3.26.
