SINGAPORE (Dec 10): RHB Research expects top pick Wilmar to continue to outperform its peers in the plantation sector in FY19F given its diversified portfolio and downstream exposure should enable the group to mitigate the fall in CPO prices.
As Wilmar’s processing and merchandising capacity for palm oil is far larger than its plantation output, RHB believes the lower earnings from plantation will be mitigated by positive palm refining margins.
In addition, Wilmar is the largest biodiesel producer in Malaysia and Indonesia and rising biodiesel mandates could help to raise demand and bring higher margins to Wilmar’s tropical oil segment.
“Maintain “buy” with new target price of $3.58 from $3.69 with 3.3% FY19F yield. This is due to a reduction in our in-house CPO price assumptions to MYR2,200 (US$553) for FY19 and US$632 for FY20,” says analyst Juliana Cai in a Monday report.
Meanwhile, the US-China trade war is expected to have limited near-term impact on Wilmar, as the latter is currently using Brazilian soybeans. Soybean crushing is also expected to normalise as the group depletes its low-cost inventories. This should be partially offset by improving margins on the consumer front, as China moves from unbranded to branded rice.
With sugar prices having rebounded from the low, this should benefit Wilmar’s sugar plantation business in Australia and Africa. Shree Renuka could also benefit from better milling margins. However, Cai says the contribution from sugar upstream business is small and the bulk of the profits still comes from merchandising.
To recap, CPO prices had reached a low of US$564/tonne before recovering slightly. RHB says this is due to the continued rise in CPO stock levels in Malaysia to 2.72 million tonnes in October, and the decline in crude oil prices from a high of US$84/barrel one month ago to US$54/barrel currently.
Given these reasons, RHB’s in-house CPO price forecasts are now reduced to tonne US$553/tonne from US$617/tonne for FY19, and to US$632/tonne from US$617/tonne for FY20. As such, RHB’s earnings for Wilmar are reduced by 4.5% for FY19F and higher by 1.1% for FY20F.
“Maintain BUY with lower SOP derived target price of $3.58. We lower our target price from $3.69 as a result of the lower CPO price and (as a result) oil palm plantation earnings,” says Cai. The IPO of its China operations is still on the plate and remains the key catalyst for its share price.
As a 12.25pm, shares in Wilmar are trading at $3.16 or 12.2 times FY19F earnings.
