Wilmar - Buy: The Preferred Downstream Player

CPO price assumption — We do not expect a sustainable rally in CPO price in 2009 after the recent surge, which has been driven by the decline in Malaysian production and significant reduction in stock levels. We are revising our FY09 CPO price assumption for Wilmar based on our revised sector assumption for 2009 of US$610/t from US$550/t previously.

Raising FY09E earnings, marginal change in target price — Factoring in our upward revision in average CPO price for FY09E, we revise our FY09E earnings forecast up by 3%. Correspondingly, our target price has been tweaked marginally to S$4.33 from S$4.32 previously.

Prefer downstream player — After the recent rally of all plantation names across the region, we recommend investors switch to downstream player Wilmar for its better quality earnings profile. We believe that CPO prices are unlikely to stage big movements from current levels, curbing earnings growth prospects for upstream players.

Reiterate Buy — CY09 P/E of 13.2x is at a 19-34% discount to the Malaysian planters. We believe this valuation gap should narrow given Wilmar’s scale, strong management, emerging market exposure, and relative earnings resilience. It also has a strong balance sheet with net gearing of 0.24x as at FY08. At our target price of S$4.33, Wilmar would trade on a FY09E P/E of 16.8x and FY10E P/E of 15.7x.

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