Period

3Q15 for Wilmar International Ltd.

Actual vs. Expectations

Wilmar’s 9M15 core net profit* (CNP) of USD816m was within expectations at 70% of consensus estimate (USD1.17b) but missed ours at 65% of our forecast (USD1.25b).

The main variation was higher-than-expected effective income tax rates of 23% in FY15 against our expected 17% (the Singapore corporate tax rate). We gather this was due to higher income contribution from foreign subsidiaries for which higher tax rates apply.

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 9M15 CNP improved 1% to USD816m as Oilseeds & Grains (O&G) PBT jumped 128% to USD526m on soybean crushing margin recovery and margin expansion in the Consumer Products sub-segment. However, Tropical Oils (TO) segment’s PBT declined 36% to USD433m due to lower CPO prices (-7% to RM2,058/metric ton (MT)) and flat FFB production at 3.25m MT.

QoQ, Wilmar’s 3Q15 CNP jumped 85% as Sugar saw a seasonal turnaround with USD109m PBT. O&G PBT also doubled to USD244m on higher manufacturing and consumer products volume in addition to the reasons discussed above. However, TO PBT weakened 40% to USD105m on weaker CPO prices (-6%) and slightly lower FFB production (-2% to 1.13m MT).

Outlook

Under the TO segment, we think that a pickup in biodiesel purchases by the Indonesian government bodes well for Wilmar’s downstream operations, but upstream performance may be weakened by lacklustre near-term CPO prices.

The O&G segment should continue to see positive crushing margins on ample soybean supply and lower expected supply of competing oilmeals.

Change to Forecasts

We lower our PPB FY15-16E CNP to RM935-1028m (- 4% and -5%) and Wilmar FY15-16E CNP to USD1.19- 1.24b (-5% and -6%) as we update our tax assumption for Wilmar to 21-22% to reflect higher contribution from foreign assets.

Rating

Maintain MARKET PERFORM The potential margin improvement in downstream divisions could be limited by industry-wide overcapacity and persistently low CPO prices.

Valuation

Our TP of RM16.92 is unchanged as we maintain our 19.5x Fwd. PER but roll forward our valuation basis to FY16 EPS of 86.7 sen (from FY15-16E average EPS of 86.8 sen). Our 19.5 Fwd. PER valuation is based on the 3-year historical mean valuation, justified by our neutral outlook on PPB and its associate Wilmar.

Risks to Our Call

Lower-than-expected earnings from Wilmar or PPB’s core business divisions.

Weaker consumer sentiment may impact sales.

Source: Kenanga Research - 12 Nov 2015