Wilmar International - Slower volume growth

We now expect just 10% in volume growth for its oilpacks division, halving our previous expectation of 20%. However, there is only a 3% reduction in our earnings expectation for FY09, given year-to-date firmness in palm prices which has helped its plantations division. Post the strong performance in the stock, we lower our rating to Neutral, on an unchanged price target of S$3.00.

Oilpacks growing but now at a slower pace. A weaker data set in edible oil imports plus a weak macro backdrop in China leads us to now expect volume growth at 10% YoY to 3.2m tons (versus 20% previously) for its oilpacks division. While we still expect better margins this year (US$50/ton vs US$25/ton on average last year), we have reduced our assumption by 10% from our previous margin expectation of US$55/ton). While its oilpacks consumer division was the smallest profit contributor (at 4% of its profit pool) of its four divisions in FY08, contribution from this division was expected to grow strongly this year, driven by better margins due to the fall in input prices and continued volume growth.

Diversity helps in balancing net earnings for FY09. Firm palm oil prices, which on average are likely to be close to US$600/ton for 1H09 will help the profitability at its palm plantation division, mitigating the negative impact from its oilpacks consumer division. We also expect continued strong performance from its key merchandising division − in both palm and oilseeds, where we expect volume growth of 5%. Palm and oilseeds merchandising divisions remain 70% of its profit pool.

Strength in balance sheet management. Working capital needs has declined sharply due to falling commodity prices, leading to a cash level of US$2.9bn (vs US$1bn end FY07) - helped by a US$1.1bn YoY decline in inventories and a US$0.3bn YoY decline in receivables at end FY08. Its cash conversion cycle had also improved sharply to 45 days (vs 61 days previously). Adjusted for liquid inventories and receivables, its adjusted net gearing would only be 10%. Wilmar also has up to US$7bn in fresh liquidity, as it has only utilised 47% of committed debt lines at end FY08. There are ample resources for M&A.

Earnings for FY09 reduced by 3%. 12-month price target: S$3.00 based on a PER methodology. Catalyst: Volume growth in excess of 5% for its key palm and oilseeds merchandising units. Wilmar is a large and profitable downstream processing company, with approximately 88% of its profit pool derived from its divisions ex plantations. Our price target of S$3.00 implies a PER of 12x.

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