Bird flu stricken. Wilmar booked 1Q14 core earnings of US$215m (-31% y-o-y; -39% q-o-q) – 28% below the lower end of our expected range. The weak results reflect a 61% yo- y drop in M&P pretax; partly offset by a 53% y-o-y jump in Plantation contribution and 26% y-o-y jump in Consumer contribution. Wilmar reported Oilseeds & Grains M&P pretax loss due to soybean oversupply in China, made worse by the re-emergence of bird flu, which caused soybean meal prices to drop. Meanwhile, Palm & Lauric M&P saw its margin eroded as new refineries in Indonesia competed for more CPO.
FY14F/FY15F earnings cut by 21%/19%; as we adjust both Oilseeds & Grains and Palm & Lauric pretax margins/MT by 23-90%. Plantation and Consumer segment profit forecasts are unchanged. Our DCF estimate on the counter is likewise cut to S$3.30 (WACC 7.0%, Rf 3.0%, ERP 7.7%, Beta 1.2, TG 3%).
A flatter outlook ahead. We expect Wilmar’s Oilseeds & Grains to
recover in subsequent quarters, although 1Q14 losses should drag down the overall number for the year. We now forecast Palm & Lauric M&P margin to average US$21/MT (vs previous forecast of US$27), as we expect CPO prices to remain strong. Sugar pretax should also seasonally improve in 2H14, although we now expect a slightly lower sugar ASP.
Weakness priced in. We believe the market has more than priced in lower earnings this year and to some degree, a higher risk premium. We do not expect catalysts for the counter in the near term; and are cutting our call to HOLD for a small 3% upside (excluding 2% dividend yield).
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