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Morningstar | Wilmar’s Shares Remain Undervalued Despite Short-Term Hiccups; FVE Reduced to SGD 3.70

Stripping out a provision for impairment of USD 138.6 million for its sugar business in Australia, Wilmar’s 2018 net profit of USD 1.13 billion, down 6% year over year, was above our expectation on the back of stronger profit contributions from joint ventures and associates in China, Europe, and Vietnam. However, we cut our fair value estimate to SGD 3.70 from SGD 3.80 after taking into account higher capital expenditure as the firm remains active in expanding its operations. We think Wilmar is undervalued at current share price with the listing of the firm’s China operations in 2019 being a near-term catalyst.

Although lower crude palm oil, or CPO, prices, has affected the firm’s plantation business, this was mitigated by a 7% increase in production of fresh fruit bunches. In addition, the downstream manufacturing and merchandising business benefited from the lower feedstock costs and a 5% jump in sales volume. As a result, the tropical oils segment’s pretax profit was up 37% year over year to USD 546 million. Given that CPO prices have started to recover and margins for downstream processing remain stable, we believe earnings from tropical oils will continue to be resilient in 2019.

Meanwhile, the oilseeds and grains segment saw pretax profit rising 20% year over year to USD 875 million, largely attributable to higher sales volume, improved crush margins and robust performance from the consumer products business. Although weaker crush margins have affected the fourth-quarter earnings, this was due to lower meal demand caused by the African swine fever outbreak in China. Management guided that the swine fever and a sharp drop in Brazilian soybean basis will have negative impacts on crush margins in first-quarter 2019. Nonetheless, the situation should improve in the second quarter. In our view, these headwinds are just short-term hiccups and we believe long-term demand for oilseeds and grains in China should remain firm on the back of rising household income.

The sugar segment was the weakest link and reported a pretax loss of USD 123 million, compared with a loss of USD 25 million in 2017. The loss in 2018 was mainly due to an impairment loss of USD 138.6 million for the milling operations in Australia after taking into account lower long-term sugar prices. Excluding this, the segment should be profitable in 2018 with sales volume increased by 7% year over year. We think management will focus in turning around the sugar business going forward and we expect a better performance for this division in 2019 given the recent recovery in sugar prices.