SINGAPORE (July 4): RHB Research is reiterating its “buy” call on Wilmar International with an unchanged target price of $3.59, while highlighting ongoing market uncertainties and the recent retracement in share price as a good opportunity to accumulate the stock.

The research house has left its forecasts largely unchanged despite recent concerns of a trade war emerging between US and China, as it believes the low soybean prices at present will help to offset tariff fears.

Given today’s higher utilisation rate of crushing facilities and lower soybean prices, RHB maintains that its current margin assumptions of US$12.50 and US$12 per tonne for FY18 and FY19, respectively, are still achievable.

“We believe Wilmar’s share price has come down on the back of looming uncertainties over the imminent China-US trade war. However, US soybean prices have also plummeted significantly since the 25% tariff recommendation… The Chicago soybean futures contract has declined by 20% to US$8.48/bu from its peak in March after the tariff recommendation,” says analyst Juliana Cai in a Wednesday report.

“Therefore, even if the 25% tariff comes into effect, the cost of US soybeans (future price + 25% import duties) is likely to increase to US$10.60/bu, similar to pre-trade war levels. This is still much lower than the average soybean price of US$13.58/bu in 2011-14 – where Wilmar made an average annual pretax margin of US$9.45/tonne from the oilseeds crushing business alone, excluding the consumer pack business,” she continues.  

With the next harvesting cycle for US soybeans due in Sept and China likely to import most of its soybeans from South America from now till Nov, Cai says this gives China and the US more time to negotiate soybeans out of the tariff list.

“Currently, Brazil soybeans from the Santos port are priced at around USD9.77/bu, a 15% premium to US soybeans. Even so, we note that this is about 3% lower than the average US soybean prices in 1Q18, when Wilmar recorded a decent crush margin,” notes the analyst.  

“Although CPO prices remain soft, we think the company’s tropical oil segment could be supported by stronger biodiesel demand this year,” she adds.

As at 10.08am, shares in Wilmar are trading 1 cent lower at $3.06 or 0.86 times FY18F book.