Wilmar CPO price will continue to gain some strength

Company Overview
Wilmar International Limited is Asia’s leading agribusiness group. Its business activities include oil palm cultivation, oilseeds crushing, edible oils refining, sugar, specialty fats, oleo-chemicals and biodiesel manufacturing and grains processing.

- Appreciated by 13% over the past 2 months
- Impact from lower CPO prices limited
- Downgrade to Neutral with higher target price of S$3.70

What is the news?
Wilmar share price has increased significantly recently. The company’s share has appreciated by about 13% since our rating upgrade on 12 November 2012 at S$3.17. Similarly, CPO prices have also increased by about 8% over the past one month. Meanwhile, China’s soybean crushing margin went back to negative region again since mid-Oct (see figure 3), indicating that the soybean crushing situation in China still remain difficult.

How do we view this?
We believe CPO price will continue to gain some strength in 1Q13 before fading gradually going into 2Q13 amid:
1) seasonally weak CPO demand in absence of major celebrations/festivities in Asia;
2) stronger CPO supply production coming from both Malaysia (due to recovery from lagged El Nino impact) and Indonesia (due to improving plantation age profile); and
3) record-high palm oil stockpile at the start of 2013.
Despite lower edible oil prices, we do not expect
these to have much of a negative impact on Wilmar albeit revenue may fall. Nonetheless, being a significant downstream player, the group may benefit from lower feedstock prices. In fact, based on our estimates, it still sources around 55% of its requirements from third party plantation companies for its Palm & Lauric business.

Investment Actions?
We adjust our FY13E/14E net profit forecast by 2.3%/2.2%. We are also bumping up our valuations slightly from 13.0x FY13E PER to 14.0x blended with DCF, deriving a fair value of S$3.70. However, Wilmar’s share price closed at S$3.59 on 4 January 2013, which suggests that there is limited upside to our new target price of S$3.70. We are downgrading Wilmar to Neutral (from an Accumulate). Based on our estimates, Wilmar is trading at an estimated FY13E P/E of 14.5x, which is in line with its 5-year average of 14.4x. The stock is currently trading at 14.0x consensus earnings which is not demanding, and is slightly below the 5-year average.