Results
• Wilmar International’s (Wilmar) 2Q12 results were much below expectation. The misses in 2Q12 were:
a) Loss making in soybean business continued in 2Q12 although at a smaller loss of US$8.7/tonne vs US$11.9/tonne in 1Q12. But to our surprise, management attributed the losses to the renminbi depreciation against the US$ in 2Q12 and to poor crushing margin. There was no mention about the timing of purchase, which might indicate there were no trading positions in 2Q12. But we need to verify this during the coming analyst briefing.
b) Consumer pack sales weaker then expected. 2Q is usually a weaker sales quarter for this division, but sales were below our expectation. Sales volume rose only 7.2% yoy and contracted 25.6% qoq We were expecting sales volume growth to be in the mid-teens as selling prices for consumer pack stayed relatively flat except the price adjustment (+5-8%) to peanut oil and rapeseed oil in Mar 12.
• Upstream production fell and operating cost rose. FFB and CPO production came in
weaker then expected. We saw this trend across the industry, not just to Wilmar. Upstream pre-tax margin fell to 19% vs 22.8% in 1Q12 and 27.6% in 2Q11. The lower margin was attributed to higher labour and fertiliser costs, which hit across the industry in Malaysia and Indonesia. Also in Indonesia, the cost of buying FFB from plasma and third parties was relatively higher as the FFB price adjustment slightly lagged the CPO price trend.
• Sugar losses widened qoq and yoy to US$79.1m (1Q12: US$58.0m, 2Q11: US$49.6m). Although losses in 1H is a seasonal trend, 1H12 losses of US$137.1m were 90% larger than in 1H11 due to the wet weather in Australia which delayed the crushing season and led to lower sugar production. 2H12 will see strong profit contribution to offset the losses in 1H12 but margin for 2012 would be affected by higher operating cost from the acquisition in late-11.
• Palm & lauric the only division to meet expectation. The lower pre-tax margin of US$28.5/tonne in 2Q12 (1Q12: US$45.5/tonne) was within expectation as margin in Indonesia narrowed slightly amid softened CPO prices and offset by refining losses. Oleochemical and biodiesel’s pre-tax margin also shrank on weaker demand. For 1H12, pre-tax margin was US$36.6/tonne for this division, still better than our expectation of US$33/tonne as we expect margin to be lower with new refining capacity coming on stream in Indonesia. Volume growth was also on track and should pick up in 2H12 as CPO production would be stronger in 2H12.
Stock Impact
• Outlook still cloudy with low earnings visibility. The uncertainty in Wilmar’s results still lies in its China operations, especially the soybean crushing business. This is an industry that has large overcapacity and high volatility in margins. We do not forsee Wilmar’s management to guiding for a better outlook for its China operations in 2H12 in the coming analyst briefing.
• Palm operations should be stronger 2H12, based on the production recovery while relatively stable pricing would boost its milling and refining operations. Higher volume but lower pre-tax margin would be the key trends for 2H12.
Earnings Revision/Risk
• We cut our 2012-14 EPS forecasts by 22-30% to 19.2 US cents, 22.6 US cents and 21.9 US cents respectively, on the back of our lower assumptions for:
a) Oilseed & grain: Factoring no profit contribution for 2012 (previously a pre-tax margin of US$5/tonne) and lower sales volume growth from -5% to -10% for 2012.
b) Lower sales volume from consumer pack. We reduce sales volume growth for 2012 and 2013 from 15% yoy each to 2% yoy and 10% yoy respectively.
c) Cut upstream production too, mainly from a cut in FFB yield to factor in the lower-than-expected 1H12 performance, and also cut the utilisation rate and adjusted the cost for its mills.
Valuation/Recommendation
• Downgrade to SELL with a lower target price of S$3.30 (previously RM4.70), based on the sum-of-the-parts valuation, pegging 15x 2012F PE for its palm operation and consumer pack, and 10x 2012F PE for the other businesses. Expect share price to react to the weak results but not as bad as during post 1Q12 results. Entry price is S$2.80.
Share Price Catalyst
• Strong demand in China for Wilmar’s products.
• Strong CPO prices.
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