SINGAPORE (Nov 18): OCBC Investment Research is downgrading Wilmar International to “hold” after warning uncertainty over soybean crushing margins may grow as the trade dispute between the US and China becomes more prolonged.

“We update our USD/SGD assumptions and also lower our P/E slightly from 13x to 12.5x such that our fair value estimate slips from $3.51 to $3.42. With limited upside, we downgrade our rating to hold,” says analyst Low Pei Han in a Friday research report.

Low says management expect its margins to be impacted by lower global soybean crushing margins due to a decline in soymeal demand in China as the country reduces the percentage of it in animal feed.

But if that happens, Wilmar says its underutilised soybean processing plants can be used to process rapeseeds which is an alternative for soybean in animal feed. China may also choose to release some of its soybean stocks next year on the back of higher tariffs on US soybean imports.

Nevertheless, management expects most of its operations to continue to do well in the coming quarter.

To recap, Wilmar reported a solid set of 3Q18 results. Revenue fell 4.3% y-o-y to US$11.6 billion ($15.9 billion) and a 10.7% rise in earnings to US$407.4 million in 3Q18, bringing 9M18 earnings to US$927.1 million or 82% of OCBC’s full-year estimate.

Year to date, shares in Wilmar are up 3.5% to $3.25.