SINGAPORE (Nov 28): Wilmar, the largest palm oil processor in the world, has appeared in the “danger zone” of Exotix Capital’s cashflow stress test.

This comes agter the research house stress tested the cashflows of 42 consumer companies on their vulnerability to an interest rate hike and depreciation.

Currently, palm oil and soybean are facing excess supply. This follows the imposition of tariffs on US soybean imports by China as part of the trade war while palm oil is facing a glut.

Crude palm oil (CPO) prices have dropped almost 20% in 2018 to its lowest in three years.

The last time palm oil fell by this magnitude over a six-month period was in 2008 where Wilmar saw a 23% drop in its 4Q08 pre-tax earnings.

In its report <i>Is there a Debt Bomb Ticking?</i>, Exotix's analyst Nirgunan Tiruchelvam says the spectre of inventory writedowns is once again looming over the horizon.

In addition, the group reported net interest expenses of US$187 million on net debt of US$20.5 billion for FY17.

Tiruchelvam believes that the potential unwinding of the USD-RMB carry trade could reduce the group’s FY19 net income by about 20%. A narrowing of net income by 1% could shave off a third of its earnings.

Meanwhile, the mainstay of Wilmar’s FY12-17 capex of US$6.5 billion was the tropical oils segment, which includes palm oil and soybean processing.

But in terms of capex per tonne for processing assets, this has been in excess of the industry average of US$160 per tonne and has exceeded ROIC for the past three years.

This may cause ROIC to falter in FY18-19 due to the excess processing supply.

Moreover, intense expansion in palm oil and soybean oil refining capacity have weakened refining margins in the industry.

Wilmar saw pre-tax processing margins in the palm & laurics business fall to US$10.75/MT in FY16 from US$33.4/MT in FY12. Other players such as Mewah, Indofood Agri and China Agri have also reported similar poor margins due to glut.

In a Tuesday report, Exotix has initiated a “sell” recommendation on Wilmar with a target price of $2.29.

“At about 14x EV/EBITDA 2018F, Wilmar is trading at a 36% premium to the sector average, which we think is unwarranted in light of its faltering returns and poor earnings growth,” says Tiruchelvam.

As at 12.53pm, shares in Wilmar are trading at $3.16 or 10 times 2018F earnings.

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