Wilmar kept at 'hold' by OCBC before 1Q results reveal

SINGAPORE (Apr 10): OCBC Investment Research is keeping Wilmar International at “hold” given the group is expected to report its 1Q19 results in about a month’s time, during which it may see a negative impact on earnings due to weak soybean crush margins.

This is the result of a sharp decline in meal demand from the outbreak of African swine fever in China and a sharp drop in Brazilian soybean basis, according to OCBC analyst Low Pei Han in a Tuesday report.

“As such there could be some caution in trading prior to the lead up of the results,” says Low of OCBC who has a $3.44 fair value.

To be sure, Low says Wilmar is a more diversified play compared to other pure-play CPO stocks and has relatively more stable earnings and dividends.

Currently, the stock is trading at 0.93 times forward P/B, close to its five-year historical mean. Despite a 35% fall in crude palm oil prices from early 2017 to end 2018, Wilmar’s share price has fallen by only 13% over the same period, likely due to its more diversified portfolio comprising Oilseeds and Grains, Tropical Oils, Sugar and others. This compares to the STI’s 6% rise over the same period.

In addition, the group’s dividend was even higher at 10.5 cents/share in FY18 vs 10 cents/share in FY17 and 60.5 cents/share in FY16. Tropical Oils accounted for 34% of pre-tax profit in FY18 and 25% of pre-tax profit in FY17. In comparison, Oilseeds and Grains contributed 54% of pre-tax profit in FY18 and 47% in FY17.

“A recovery in CPO prices would benefit Wilmar but at the same time good performance in the soybeans and sugar segments are also required to move the needle in the right direction,” says Low.

However, in the longer term, a proposed spin-off of its China business operations by the end of the year would unlock value and inject more transparency to valuations, adds the analyst.

As at 11.18am, shares in Wilmar are up 1 cent at $3.50 or nearly 13 times FY20F earnings.