Wilmar finally success with the Acquisition of Proserpine

CITI - TP S$6.10

Wilmar International (WLIL.SI) Alert: Finally, Success with the Acquisition of Proserpine

- Acquisition of Proserpine sugar mill – Wilmar’s Sucrogen unit has been awarded Proserpine by the latter’s administrators for A$120m, along with working capital and the absorption of operating costs and capex since 31 Oct. Sucrogen will also provide a second loan of A$15m to support Proserpine until the transaction is complete. This deal will have to be approved by Proserpine’s creditors by 12 Dec.

- Scaling up on sugar –Wilmar’s addition of Proserpine will help increase its market share in Australian sugar cane processing to near 50%. Proserpine will help add about 1.7m MT to the 15m MT of cane processing that Wilmar already owns via Sucrogen (Sucrogen was an acquisition from 2010 for an enterprise value of A$1.75bn), leading to a ~10% increase in raw sugar production to 2.2mt.

- Strategy of benefiting from Asia’s 13.6mt sugar deficit - Wilmar's move into Sucrogen is aimed at helping it to expand into sugar plantations in Indonesia, with a 200k ha plantation planned in West Papua. Wilmar aims to benefit from Asia’s 13.6mt sugar deficit. Indonesia alone runs a 2mt deficit on sugar with India and China having a 3-4mt deficit each. This will involve US$1bn in capex, with first benefits 4-5 years out.

- Looking for soybean volumes to recover further in 2H11 — China is a major importer of soybeans and edible oils and we expect it to continue growing on this path. Oilseed importers continue to expect China to import ~60m MT soybeans this year (+20% YoY); implying a near 50% QoQ increase in 4Q11 given that China has only done less than 40m MT in imports at the end of September. Wilmar’s oilseeds division (China’s largest oilseeds crusher) had reported an increase in volumes in oilseeds (5.7m MT, +15% YoY) in 3Q11. Wilmar had only processed a total of 8.1m MT in oilseeds in 1H11, a decline of 6% YoY.

- Growth beyond China - While Wilmar is a dominant firm in Chinese oilseeds crushing and bottled edible oils and continues to add to its profile there, it is also rapidly adding to its asset base outside China (e.g. Sucrogen in Australia as well as Indonesian sugar refiner Jawamanis), so this proposed transaction with Proserpine would help add further momentum to Wilmar's growth ex-China. Sugar is ~5% of its profit base this year and there is potential for this to scale higher as it executes on its

Wilmar International

Valuation
We value Wilmar using a SOTP valuation matrix framework, where we impute future contribution ratios from its five business units against our assumed PER ratings. We value Wilmar's plantation division based on 15X PER, its merchandising and processing units based on 15x PER (the average historical PER for large scale processors such as Archer-Daniels-Midland (ADM) and Bunge over the past 10 years), its sugar unit at 18x PER and for its branded consumer products segment, we apply a PER of 25x, ~15% discount to the average PER of dominant Chinese packaged food firms listed in HK. Based on the contribution ratio of 20% from its plantation unit, 25% each from its palm and oilseeds merchandising/processing units, 15% each from its sugar unit and packaged consumer unit, we expect Wilmar to trade at a blended PER of 17X (i.e. its average PER historically).

Risks
Downside risks to our target price include: 1) trading risks from commodity prices and counterparty risks; and 2) lower than expected global CPO and soybean production, slower end demand levels for food & industrial products.


AM Fraser

Wilmar - Buys Proserpine assets Wilmar International has agreed to buy the assets of Proserpine Cooperative Sugar Milling Association for A$120mil (S$157mil). The current agreement comprises a headline price of A$120mil, plus a working capital adjustment, normal settlement adjustments, as well as provisions whereby Sucrogen will absorb all of the mill's normal operating costs and certain critical capital expenditure incurred from Oct 31, 2011 until completion of the transaction.