We estimate underlying 2009E-2010E ROE at 23% (vs. reported ROE of 15%-16%), and our analysis indicates that incremental investments in Wilmar’s core merchandising and refinery, consumer products and plantations divisions could generate returns as high as 27%-86%. The market has seemingly been concerned that Wilmar’s downstream margins have been boosted by unsustainable directional trading. We disagree, as we believe there has been a significant change in the competitive structure of Wilmar’s key downstream businesses, while our analysis of similar agri-processing businesses worldwide indicates margins are not only sustainable but may have upside risk over the long term.
On an adjusted basis, Wilmar’s 2010E underlying ROE and CROCI move up to the top quartile of comparables in the Singapore market and plantations sector, while “reported” figures put Wilmar in the middle to last quartile. This could have positive implications for the company as investors tend to reward stocks in the top quartiles with premium valuations. Our new 12- month target price of S$6.50 (up from S$4.70) is based on 15X CY10E P/E, comparable to its historical 6X-19X trading range (since listing) and at a 15% premium to the Singapore market average. Our DCF-based SOTP is S$7.40/share. We reiterate our Buy rating and add it to our Conviction List.
Key risks are sharp decline in CPO or oil price; adverse government policy in China.
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