Wilmar International - limited upside to target price

Stock has outperformed, downgrade to Neutral: We downgrade Wilmar to Neutral (previously Buy) as it has limited upside potential to our 12-month target price of S$3.15/share following the recent strength in share price, but would likely turn more positive if the stock retraces below S$2.50/share. Longer-term, investors may get more comfortable with Wilmar’s downstream earnings (83% of 2009E) and strong growth prospects, but in the short term investors may still be averse to paying premium multiples.

Dominant player in high-growth agri-segments: In our view, Wilmar should be a core holding for long-term investors as it offers high-quality, high-growth exposure to the palm oil sector given market leadership in its downstream businesses and strong organic growth potential. This is driven by:

1) plantations land bank, which is 4X its current mature area;
2) largest CPO refiner in the world with a 25% global market share;
3) China food and agriculture proxy – Wilmar is the largest oilseed and grain processor (20% market share) and the leading player in the branded cooking oil segment (>50% market share).

Increasing competitive advantage: Typically lower CPO and soybean prices would exert downward pressure on Wilmar’s US$/ton processing and merchandising margins, in our view, but with the credit crisis and commodity price volatility we see significantly reduced competition and this could improve the company’s incumbent competitive advantage.

We maintain our 12-month target price of S$3.15/share, using the same 12X CY2009E P/E multiple as before. This is at the mid-point of the stock’s historical 6X-19X trading range (since listing) and at a 20% premium to the Singapore market average of 10X, which we believe is deserved given its more resilient earnings profile. Longer-term “through-the-cycle” investors should note our DCF-driven SOTP valuation of S$4.80/share.

Upside risk - Sharp rebound in CPO or crude oil prices; earnings surprise from stronger-than-expected downstream margins. Downside risk - Refining/processing margins can be volatile from quarter to quarter. Controlling shareholder Wilmar Holdings Pte Ltd (WHPL) recently announced a share distribution scheme to be completed over the next 18 months which may raise Wilmar’s free float from 13.7% to 24.1% (potentially boosting its MSCI Singapore weighting from 2.1% to 3.7%) but could cause a market overhang (please see our Feb 4, 2009 report on Wilmar titled “Higher free float could boost MSCI weighting, but ST overhang” for more details).

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