Wilmar - Strong start to the year

Wilmar’s results from the past nine months indicates that it has been able to not only circumvent some of the harshest conditions in credit and commodity markets but it has also continued to maintain strong profitability levels. Moves to add “domestic-ownership” to its Chinese units could allow it to outgrow other large foreign competitors there which are increasingly becoming constrained by new rules. We are raising the rating on the stock back to Outperform (Neutral previously) with a new target price of S$5.00.

Sources of outperformance in 1Q09 was in margins at all its key divisions. At oilseeds (US$55/ton), palm merchandising (US$47/ton, highest post RTO) and in consumers oilpacks (with a rather pleasing US$106/ton, the first time it has gone above US$100/ton post its RTO). There was some shortfall in volumes. Consumer oilpacks and its palm merchandising division saw volumes decline 16% and 15% YoY, respectively, as opposed to our expectation for growth of 10% and 5%, respectively. Oilseeds merchandising volumes continue to power ahead, with volume growth of 25% YoY.

Balance sheet benign. Net gearing was 25%, which leaves it plenty of room to manage its business even in a firmer agricultural price environment. Its cash conversion cycle reverted back to its more normal 60 days (from 45 days at end-2008), which to us implies that heightened risk levels seen across 2H08 have begun to normalise.

Drop-off in fertilisers. Another key takeaway lies in the point that its fertiliser unit ('others') saw a loss (of US$14m) vs a profit in 1Q08. Write-offs in fertilisers as well as poorer YoY demand may show up as lower yields amongst agriculture producers in the next 6−12 months.

We have raised our earnings forecast for 2009 by 31%. Our target price of S$5.00 implies PER of 15x (versus S$3.00 on 12x earnings previously).

12-month price target: S$5.00 based on a PER methodology. Catalyst: Volume growth in excess of 5% and 9% respectively for its palm, oilseeds merchandising units.

Wilmar’s unique integrated supply chain model allows it to outperform peers which typically have smaller footprints or only operate in limited segments. We believe Wilmar is rerating as we observe that it is able to have a fairly resilient earnings stream even though it is exposed to fairly volatile commodity/palm oil/oilseeds prices.

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