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Morningstar | Wilmar’s 2Q Results Boosted by Tropical Oils Segment and Better Crush Margins. See Updated Analyst Note from 14 Aug 2018

No-moat Wilmar’s second-quarter net profit of USD 316 million represents a significant improvement from USD 59 million a year ago. All major segments posted better year-over-year results, especially the oilseeds and grains and tropical oils segments. In addition, contributions from associates more than doubled on the back of stronger earnings from China and Europe. Overall, first-half results were within our expectations, and we anticipate continued improvement in subsequent quarters. We retain our earnings forecasts but raise our fair value estimate to SGD 3.48 from SGD 3.32, after taking into account the stronger U.S. dollar and the time value of money. We prefer to buy Wilmar when there is a higher risk buffer.

Pretax profit for the tropical oils segment surged 165% year over year in the second quarter, mainly owing to better performances from the midstream and downstream businesses, despite softer crude palm oil, or CPO, prices. In particular, higher crude oil prices benefited the firm’s oleochemicals and biodiesel businesses, while the specialty fats division also saw increased global demand. We think the impact of weaker CPO prices will be offset by better margins achieved by Wilmar’s downstream operations.

Furthermore, oilseeds and grains segment’s pretax profit increased 381% to USD 290 million, underpinned by higher volume and favorable crush margins, together with better performance from the consumer products division. We expect that the oilseeds and grains segment will continue to post firm results, given the ongoing consolidation in China and the exits of the financial traders, which have previously disrupted the sector. Management also commented that while trade tensions between the U.S. and China have improved Wilmar’s crush margins in the short term, a prolonged dispute will have a negative impact due to lower plant utilization.

That said, the firm is well prepared to navigate the current challenge, as other businesses such as consumer products and rice and flour milling should continue to perform well and support earnings in the coming quarters.

The sugar segment recorded a pretax loss of USD 46 million in the second quarter, which represented an improvement from the loss of USD 107 million a year ago, on the back of better merchandising and processing operations. The loss was largely seasonal due to the timing of plant maintenance expenses, and we expect the segment to turn profitable in subsequent quarters with the commencement of the crushing season in June.