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Morningstar | Wilmar’s 3Q Results Beat Expectations; Firing on All Cylinders; Shares Undervalued. See Updated Analyst Note from 13 Nov 2018

Wilmar’s third-quarter 2018 net profit of $407 million was 11% and 29% higher year over year and quarter over quarter, respectively. Despite a SGD 47 million loss from discontinued operations, the results beat our expectations with strength all around and with increased contributions from joint ventures and associates, especially in Africa, China, Europe and Vietnam. We are raising our fair value estimate to SGD 3.80 from SGD 3.48 after taking into account the strong earnings. At the current share price, we think Wilmar is undervalued with potential catalyst being the listing of the firm’s China operation in 2019.

We believe the firm will continue to perform well in the fourth quarter. Management painted a cautiously optimistic outlook and guided that Wilmar’s past investments in new processing plants are bearing fruits, especially in China, Indonesia, and India. As such, these plants will continue to improve and see better processing margins.

The tropical oils segment’s pretax profit almost doubled year over year in the third quarter, largely attributable to improved margins from the manufacturing and merchandising business, which saw volumes increase by 9% year over year. Although the upstream plantation business was affected by lower crude palm oil, or CPO, prices, this was mitigated by an 8% jump in production of fresh fruit bunches. In particular, the downstream business benefited from the lower input costs and higher biodiesel demand.

Meanwhile, the oilseeds and grains segment was another star performer with pretax profit rising 17% year over year, underpinned by robust sales volume, strong crush margins and solid performance from the consumer products division. In our view, the oilseeds and grains segment will have stable performance going forward given the ongoing consolidation in China.

The sugar segment reported a pretax profit of USD 76 million, up 2% year over year. We think the results are commendable given that this division has suffered from losses incurred by the firm’s newly acquired subsidiary, Shree Renuka Sugars, which is looking to exit its loss-making business in Brazil. We think the better results was due to higher sales volume (up 127% year over year) achieved by the milling business, which is attributable to the new Australian Sugar marketing program, in which certain proportion of sugar produced in 2017 was sold in 2018.