SINGAPORE (Sept 13): Agribusiness group Wilmar International found itself crushed in 2Q19 by the African swine fever outbreak, which hit demand for soybeans.
For the 2Q19 ended June, Wilmar posted a 52.3% drop in net profit from continuing operations to US$150.9 million ($209.5 million).
This was mainly due to lower crush margin, as the African swine fever led to reduced pig stocks in China, which in turn brought on lower demand for soybean meal.
Revenue for the quarter fell 9% to US$9.78 billion on the back of lower commodity prices.
See: Wilmar reports 52.3% fall in 2Q19 earnings to US$151 mil on lower crush margin
Since its 2Q19 results announcement on Aug 13, shares in Wilmar have fallen as much as 8.9% – retreating further from its multi-year high of $4.11 at the end of July.
As at 12pm on Friday, the counter is trading flat at $3.86.
But market watchers continue to favour Wilmar as a top pick in the plantation sector.
“We remain upbeat on the stock as we believe the worst is behind us while the outlook for 2H19 looks rosier on the back of an improving soybean crush utilisation and increasing CPO prices,” says RHB Group Research analyst Juliana Cai in a report on Friday.
At the same time, DBS Group Research lead analyst William Simadiputra believes Wilmar’s potential is “far greater than market expectations”.
Both RHB and DBS are maintaining their “buy” recommendations on Wilmar, with target prices at $4.50 and $4.25, respectively.
Here are three reasons why the experts believe the worst could be over for Wilmar.
1) Crush margins set to improve
The way Cai sees it, Wilmar could see stronger feed demand from the poultry and aqua sectors moving into 3Q19, as consumers substitute pork with other sources of proteins. And this could help cushion the impact of the African swine fever on crush margins.
Moreover, she notes that pork prices in China have soared closed to 50% in August due to the supply shortage. The government has also introduce subsidies to encourage farmers to raise inventories.
“With rising prices and subsidies, we expect industrialised farmers to begin growing pig stock to capitalise on the higher margins. In turn, this should spark an increased demand for soybean meal from 4Q onwards,” Cai says.
“In addition, we believe the widening of Brazilian soybean basis should be beneficial to the group’s hedging strategy, reducing input costs and improving soybean crush margins,” she adds.
2) Trade war “largely noise”
While an additional 5% tariff was slapped on US soybeans starting Sept 1, analysts believe it would not have any significant impact on Wilmar. Since the initial 25% tariff introduced in July last year, the group has been purchasing Brazilian soybeans.
However, Cai believes a resolution to trade war might also not have a major positive impact on Wilmar.
“US soybean prices would likely adjust upwards to offset any reduction in tariffs,” she says. “However, the ability to access the US soybeans would definitely be beneficial to Wilmar’s operations in the longer term.”
On the whole, the analyst brushes off concerns for Wilmar over the trade war.
“News on trade war talks are largely noise for now,” she says.
3) China operations listing to spark growth
The analysts expect the impending listing of Yihai Kerry Arawana (YKA), which runs Wilmar’s China operations and YKA currently generates 60% of group earnings, to continue to support Wilmar’s share price in the near term – with a further rerating of the share price once the IPO is completed.
“As we obtain more information on Wilmar’s China operations, we are increasingly convinced that Wilmar’s potential is far greater than what the market perceives,” says Simadiputra.
At the same time, Simadiputra says Wilmar is heading towards having a more stable business model and earnings profile.
“As the market leader in each segment, Wilmar’s presence makes it difficult for competitors to operate meaningfully in each region. This gives Wilmar a solid footing to further grow its market share and earnings ahead,” he adds.
