SINGAPORE (Oct 9): Maybank Kim Eng is keeping its “hold” recommendation on agribusiness giant Wilmar International with a target price of $3.89.

Just when the worst was thought to be over for the group, China introduced a new policy that allows the imports of Argentinian soybean meal.

See: 3 reasons why the worst could be over for Wilmar

In a Tuesday report, analyst Thilan Wickramasinghe says, “With current Argentinian soymeal spreads significantly cheaper than domestic production, structurally lower crushing margins may become a material risk.”

However, the magnitude of the impact will depend on import quotas and when full regulatory clearances are received – the timing of which is unclear so far. Nevertheless, as one of China’s largest soybean crushers, the analyst will be closely watching the group’s risk here.

This is one of the factors that caused Chinese soybean crush margins fell back to negative in September, following a promising recovery in August.

Another factor that contributed to the fall in soybean crush margins is the continued fallout from African Swine Flu (ASF) reducing demand for hog feed.

On the other hand, potentially lower Chinese crush may limit soybean oil supply, paving the way for higher palm oil imports.

“Wilmar’s upstream exposure, scale and integrated supply chain make it a key beneficiary of this trend, in our view. We believe this will likely provide some offset for weaker crush margins as well as upside volume/margin surprise on its tropical oils segment in 2H19 and 2020E,” says Wickramasinghe.

Overall, the analyst expects stronger tropical oils performance and August’s positive crush margins should line Wilmar up for a better 2H19, compared to the weak 2Q19. But significant uncertainty in terms of macro and operations still loom.

As at 11.30am, shares in Wilmar are trading at $3.61 or about 1.0 times FY19 book with a dividend yield of 2.5%.