Wilarmar Initiates Its First Ever Share Buyback Program

Price target - 3.60


Repurchased 7.4m shares from the open market
Yesterday Wilmar announced that it has bought back 7.4m shares by way of market acquisition. This represents 0.115% of total share base. This does not come as a surprise to us given that management has earlier indicated its intention to initiate a share buyback program should market price falls to S$3.00/share (highlighted in our note dated 16 August 2012).

DB comment: We view this development positively as it indicates management is still confident that Wilmar’s long-term fundamentals remain intact despite the current challenging operating environment, particularly in China. As at 30 June 2012, Wilmar has a cash balance of US$5.5bn and net gearing of 1.05x. Under the share buyback mandate for market purchases, a company may purchase up to 10% of its total share base (this translates to a 640m shares for Wilmar). Our FY13 EPS is estimated to improve to S$0.28 should Wilmar repurchase 10% of its issued shares. Wilmar’s current book value is US$2.10/share (excluding goodwill is US$1.57/share).

Target price S$4.08

- Share buyback program kicks in — Wilmar has started a buyback program, with a purchase of 7.388m shares yesterday (13 Sep) at S$3.00 (equivalent to S$22m or 0.115% of shares outstanding). This accounted for approximately 31% of the traded volumes done yesterday. While it repurchased US$25m (4% of the issue) of its US$600m 2012 CB during the GFC period in April 2009, this would be its first ever share buyback program. Its share buyback mandate, renewed April 2012, allows it to buy back 10% of outstanding shares. In terms of financing, to support a share buyback program, Wilmar had cash of US$1.1b at end 2Q12 as well as credit lines for US$750m (ex its trade finance lines), with its net adjusted gearing at 0.38x.

- On the path of recovery — We believe Wilmar’s equity value will
improve as battered margins in Chinese oilseeds processing slowly recover post two quarters of weakness. This recovery is backed by our observation that the industry’s dynamic response to losses has started to kick-in and this will help reduce some of the cyclical pressures on Wilmar, views which have also been shared by some of its other competitors. Longer term, we believe that Wilmar’s scale as the leader in oilseeds processing and in consumer packs remains bestin- class and it should eventually benefit from scale and logistical advantages to consolidate an overbuilt Chinese oilseeds crushing industry and capture the profit opportunity from China’s growing deficit in soybeans.

- Investor pushback — The key risk factor cited amongst investors revolves around worries that the slowing GDP growth profile in China impacts politics and on food-pricing mechanisms there. Investors also worry on the major expansion in palm refining in Indonesia that could lead to chronic oversupply, which we believe should be weighed together with likely capacity cutbacks in Malaysia. The high level of speculative interest in soybeans earlier in the year could also mean that it could take longer for inventories to be whittled down, delaying the recovery that we anticipate.

- Catalyst — Positive catalysts for the stock would include a) the company executing strongly on its ex-China growth plans (especially in sugar in Indonesia, Africa); and b) ability to scale its consumer division in China for higher margin products including rice and flour packs.

- Valuing Wilmar from a normalized perspective — We value Wilmar at a target price of S$4.08, equivalent to a PER of 14x its average earnings for the past 5 years and just below the stock's five-year mean. We believe that the stock has over-corrected on negative revisions due to the tough situation with oilseed margins in 2012 and should recover as we expect earnings momentum to recover in FY13. We see Wilmar sustaining itself as a key conduit for supplying food into Asia.