Wilmar International – Pressure On Palm Refining Margins

Excerpts from UOBKayHian report

Wilmar International (SGX: F34)

• We are revising down our earnings estimates again and this is after taking into consideration tough palm refining operations and China’s slower-than-expected recovery.
• In the upcoming 3Q23 results, we are only expecting Wilmar International to report a core net profit of US$300m-320m (vs 3Q22’s US$796.7m and 2Q23’s US$195.1m).
• Note that the record-high profit in 3Q23 was due to palm refining margins at the higher-ever level caused by market distortions.

Downgrade to HOLD. Target price: S$3.80.

Recovery expected to be weaker and slower

The worst could be over for Wilmar International (Wilmar) as we had highlighted in our note in Aug 23. However, the recovery pace is at an unexpectedly slower pace, and pressure on palm downstream margins is not easing given the intensified competition from competing veg oil in 3Q23.

3Q23 earnings likely to be weaker than our initial expectation

Wilmar is scheduled to release its executive financial summary for 3Q23 on 26 Oct 23 after trading hours. Based on key market indicators and trends, we are expecting a core net profit of US$300m-US$320m for 3Q23, which could be its lowest 3Q profit since 2017. Note that 3Q has always been the best quarter for Wilmar due to the festive demand in China and India. Our US$300-320m expectation is a significant drop from 3Q22’s US$796.7m. However, this sharp drop should not come as a surprise as back in 3Q22, all palm downstream processors reported their best-ever margins in history due to the market being distorted by the various policies changes in Indonesia. We estimate that palm refining margins in 3Q22 ranged between US$100-120/tonne vs 3Q23’s US$5-15/tonne. Palm refining margins normally range between US$10-20/tonne.

Valuation/Recommendation

Downgrade to HOLD from BUY with lower target price to S$3.80 (previous: S$4.30) after factoring in lower earnings. Our valuation is based on 2024F EPS and uses the SOTP valuation by pegging PE of 25x, 10x and 11x for Food Products, Feeds & Industrial Products and Plantations & Sugar Mills respectively. The fair value of S$3.80 translates to a blended 2024F PE of 11.0x. Share price could see some pressure from the upcoming weaker 3Q23 results. We will deem this an opportunity to accumulate. You can find the full report  here and the company website here.