Biodiesel and EU demand to drive higher margins for Wilmar

Biodiesel and EU demand to drive higher margins for Wilmar

PC Lee
15/08/18, 03:08 pm

SINGAPORE (Aug 15): Agribusiness group Wilmar International remains RHB Research’s “top pick” in the regional plantation sector.

As the largest downstream player in the palm oil processing space, Wilmar continues to be a key beneficiary of an improving biodiesel and oleochemicals demand, says RHB.

“Moving into FY19F, we believe the IPO of its China operations will be a key catalyst,” says analyst Juliana Cai in a Wednesday report.

In 2Q18, Wilmar’s downstream margin managed to turn around in part due to a rising demand for biodiesel on the back of a positive spread between gasoil and CPO.

Moving into FY19F, Cai notes the Indonesian government is pushing for higher biodiesel blending while discretionary demand from EU has also picked after removing anti-dumping duties.

“We believe these factors will continue to support the demand momentum going forward. Since the margins for biodiesel are higher than those of palm oil refining, we expect overall processing margins to be higher in FY19,” says Cai.

According to CEO Kuok Khoon Hong, crushing margins for soybeans should remain strong next quarter as China has adequate soybean supplies and inventories to last for a few months. However, the group is unlikely to take big positions on soybeans, given uncertainties of a trade war.

“Hence, we forecast crushing margins for soybeans to taper off to a normalised level in FY19F,” says Kuok, “We do note that the end-product prices for soybean meal and soybean oil in China have not adjusted for the US tariffs yet. As such, the group may still be able to generate strong margins post-3Q18, should it be holding on to excess inventories.”

Wilmar has raised its interim dividend by 0.o5 cent to 0.35 cent. Kuok believes full-year dividend should be slightly higher than last year’s despite an unexpectedly high final dividend of 7 cents announced in 4Q17 compared to 4 cents in 4Q16.

“We believe this signals management’s confidence in its 2H18 results and we raise our dividend expectation to 11 cents for the full year, which implies a dividend yield of 3.5%,” says Cai.

RHB Research is reiterating its “buy” on Wilmar with a higher $3.69 target.

“We raised our FY18-20F earnings by 3-6% to account for the higher tropical oil downstream margins, stronger-than-expected crush margins and good performance of consumer products division. We note that the IPO of its China operations remains on track to be completed in 2Q19 or 3Q19 and believe it will unlock some of the latent value of the stock.

As at 2.54pm, shares in Wilmar are up 2 cents at $3.27 or 11.6 times FY19F recurring earnings.

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