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SI Research: Wilmar International – Sweeter Year Ahead

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Asia’s leading agribusiness giant Wilmar International (Wilmar) posted its FY18 results after the market closed on 21 February 2019. When the market reopened the following day, Wilmar’s stock gapped down from a 52-week high of $3.40 to $3.26, registering a negative four percent post-earnings performance.

Despite that, Wilmar’s latest results were largely in line with the market’s expectations. We looked deeper into the earnings announcement to understand what contributed to the post-earnings sell-off and if the stock still offers good value to investors.

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Brief Introduction

Wilmar needs little introduction. The conglomerate has its hands in the entire agribusiness commodity value chain which includes oil palm cultivation, oilseed crushing, edible oils refining, sugar milling and refining, manufacturing of consumer products, specialty fats, oleochemicals, biodiesel and fertilisers as well as flour and rice milling.

With a market capitalisation of $20.6 billion, Wilmar is the seventh-largest listed entity on the local bourse. Interestingly though, its revenue of US$44.5 billion in FY18 dwarfs that of the top holders such as DBS Group Holdings and Singapore Telecommunications.

 FY18 Results Overview

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Table 1: Wilmar FY18 results

In FY18, Wilmar generated net profit of US$1.1 billion on revenue of US$44.5 billion. Compared to a year ago, the topline grew by 2.1 percent while the bottom declined 5.7 percent. In perspective of an agri-commodity business, gross margin in FY18 was significantly higher at 9.9 percent compared to 8.7 percent last year.

Other than generating higher gross profit of US$4.4 billion compared to US$3.8 billion a year ago, contributions from joint ventures and associates were also significantly better. Overall, in FY18, share of results increased 35.9 percent to US$310.3 million owing to stronger profit contributions from investments in China, Europe and Vietnam.

Despite strong performance across most business units, profitability was hit by higher net finance costs of US$352.1 million (FY17: US$253.2 million), lower net other operating income of US$50.6 million (FY17: US$150.1 million) due to lower foreign exchange gains arising from the revaluation of Wilmar’s financial assets and liabilities, a non-operating loss of US$136.2 million and a loss of US$43.4 million from discontinued operations. The higher net finance costs were a result of higher effective interest rates and average bank borrowings while non-operating loss mainly related to a provision for impairment for its goodwill and Australia sugar milling business.

Excluding the non-operating and one-off items, Wilmar’s core operating net profit for FY18 was actually 27.4 percent higher at US$1.3 billion.

Segmental Breakdown

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Table 2: Segmental performance

Breaking down the segmental performance (Table 2), we can see that tropical oils segment saw the highest growth in profitability, posting an improvement of 37.4 percent in segmental profit despite a slip in revenue. This was due to lower crude palm oil prices which benefitted Wilmar’s downstream business through lower feedstock costs.

Over in the oilseeds and grains business, good crush margins and strong demand from the consumer products sub-segment helped lift segmental profit by 20.3 percent to US$875 million. However, the group’s management has warned of lower crush margins in the manufacturing sub-segment of oilseeds, arising from lower meal demand caused by African swine fever outbreak in China in 4Q18. Margin pressure is expected to continue into 1Q19.

Meanwhile, over in Wilmar’s sugar business, lower sugar prices continued to plague the segment. It generated a segmental loss of US$123 million on revenue of US$4 billion, compared to a loss of US$24.6 million on revenue of US$4.8 billion last year. Part of the segmental loss was attributable to the impairment loss on the assets of the Australian milling operations.

Under the others segment, lower profit of US$19.9 million was recorded as a result of lower investment income generated from the group’s investment portfolio, owing to a volatile stock market in FY18.

Cautiously Optimistic Outlook

Summing up, Wilmar’s FY18 profitability was hit by volatility in the capital markets, higher financing costs due to higher interest rates and low sugar prices which influenced the management to recognise impairment on the Australian milling operations. Going into 1Q19, management has also guided to lower demand for oilseeds and grains (soybeans) in China, coupled with a sharp drop in Brazilian soybean basis. These clues offer us some indication to how Wilmar’s performance in FY19 would be influenced.

As seen in the first two months of February, capital markets seem to be seeing greater stability which should bode well for the conglomerate. The US-China trade war, which has rattled the market in FY18, is finally seeing signs of a possible resolution. In addition, the US Federal Reserve has taken on a more dovish stance on interest rate hikes, contributing another stability factor in the form of financing costs and exchange rates.

Although management has guided to headwinds in the oilseeds and grains segment in the near term, improvements in crush margins are still expected in 2Q19. In the meantime, its tropical oils segment is likely come in to support the shortfall, especially in the downstream as FY18 results demonstrated. In the upstream, management is also expecting better margins owing to a recent recovery in crude palm oil prices.

According to a Reuters survey of 10 analysts and traders, low sugar prices are also expected to see a significant reversal, as the sugar market swings into a deficit in 2019. In addition, Wilmar’s newly acquired Indian subsidiary Shree Renuka Sugars (SRSL) only commenced sugar crushing operations in late October last year. It remains to be seen, but a full-year ramp-up in scale at SRSL should reap better contributions and possibly provide some margin support.

Valuation And Potential Catalyst

In the latest FY18, Wilmar declared a final dividend of $0.07 per share to bring full-year dividend distribution to $0.105. At the current share price of $3.33, the full-year distribution represents a dividend yield of 3.2 percent. Meanwhile, the current share price also translates into a price-to-earnings multiple of 13.3 times and a price-to-book value of 0.9 times.

Balance sheet wise, risk-averse investors might find it difficult to swallow Wilmar’s massive debt level which stood at a total of US$23.3 billion, representing over 144 percent of its shareholder equity. However, it is good to note that it is not an uncommon practice for commodity companies to use high level of debt financing due to the nature of the business. Its net debt (less cash and other financial products with financial institutions) of US$13.5 billion which translates to a net debt-to-equity of 84 percent appeared more manageable.

That said, the group has recently converted its China holding company into a joint-stock company, in view of a proposed separate listing in China. Geographically, China operations contribute more than half of the group’s revenue. Furthermore, agri-commodity business is one that typical Chinese investors can relate more to than local retail investors. As such, the separate listing in China could unlock shareholder value at a higher premium. In addition, Wilmar could also use these proceeds to pare down its borrowings to enhance shareholder value.

Conclusion

As a whole, we find that Wilmar’s post earnings sell-off was largely due to a weak near-term outlook, coupled with speculation that drove the stock higher before the earnings announcement.

However, the group has demonstrated its strong execution capabilities in scaling up its downstream operations to weather a challenging environment last year – a testament to a strong management team. In FY19, we see better macro conditions for Wilmar. A possible catalyst from a separate listing in China definitely sweetens the deal.

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