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Strong margins & China listing to support Wilmar's share price after a decent 1Q, say analysts

Michelle Zhu

SINGAPORE (May 17): RHB Research and UOB Kay Hian are maintaining their “buy” calls on Wilmar International with target prices of $3.94 and $3.90, respectively, while OCBC Investment Research keeps its “hold” call on the stock with a higher $3.66 fair value estimate.

This comes after the plantation group reported a 26.4% rise in 1Q19 earnings to some $350.5 million, boosted by improved performance in the Tropical Oils and Sugar segments.    

In a Thursday report, RHB analyst Juliana Cai says Wilmar remains her top pick for the plantation sector as she is even more upbeat on the group’s 2Q19 earnings prospects post a recent analyst briefing.

Based on management feedback, Cai believes the Tropical Oils segment will remain strong on low feedstock costs, while Oilseeds & Grains should improve as soybean crush margins turn positive in the current quarter.

Tropical downstream margins are also expected to benefit from low crude palm oil (CPO) prices going forward, with 3Q processing margins to remain strong with the likelihood of stocked up cheap inventories on Wilmar’s end, adds Cai.

As such, the analyst has revised in-house CPO and palm kernel (PK) price assumptions to MYR2,200, MYR2,400 and MYR2,500 per MT and MYR1,300, MYR1,550, MYR1,550 for FY19F-21F.  

“This has tweaked our FY19F-21F earnings by -2% to 2%. We also roll over our valuation base year to FY20F, resulting in a higher SOP-derived TP of $3.94  [from $3.80 previously],” says the analyst.

Similarly, UOB analyst Leow Huey Chuen thinks Wilmar is likely to sustain the positive 1Q19 results performance into 2Q considering its recovering crush margins and higher soybean crush volumes.

With the recent round of tariff hikes by the US and China having less impact on the soybean market as compared to the previous round of hikes, Leow sees less distortion to Wilmar’s soybean crushing operations and the securing of raw materials.

“After the 2H18 experience, Chinese buyers are not in hurry to secure soybean supplies and are waiting patiently for the price to stabilise. There is still ample soybean supply in China, and the soybean crushing sector is also recently undergoing consolidation again, which is allowing Wilmar to capture larger market shares. This is expected to translate into higher utilisation rate and higher sales volume in 2Q19. As such, we are expecting higher q-o-q contributions from oilseeds & grains,” he explains.

Both Leow and Cai are also positive on the upcoming listing of Wilmar China (Yihai), which is likely to materialise in 4Q19, with the latter analyst highlighting the IPO as Wilmar’s key catalyst to its share price performance.

While OCBC analyst Low Pei Han considers Wilmar’s latest 1Q19 earnings performance “reasonably good”, she intends to monitor the group’s Sugar and Palm plantation segments going forward.  

Nonetheless, Low also expects improved crush margins in 2Q and has increased her price-to-book valuation on the stock from 0.9 times to 0.95 times based on the five-year historical average.

“Good management in [the crushing business] and better contributions from other parts of the group’s diversified portfolio have allowed [Wilmar] to report a reasonably good set of results. The improved performance by both Tropical Oils and Consumer Products since 2Q18 has also been encouraging,” says Low.

Shares in Wilmar last traded 2 cents lower at $3.53 before the midday trading break, or 1 times Dec-19F book value based on RHB estimates.