81

Singapore | Consumer staples

Asia Pacific Equity Research

SOFT COMMODITIES SECTOR | NEUTRAL 27 Jun 2018 Sector Update

CONTENDING WITH GREATER FORCES • • •

Soybean tariffs coming on 6 Jul Actual impact to be seen after Aug CPO prices still weak

NEUTRAL (maintain) Analysts Low Pei Han, CFA (Lead) ● +65 6818 4814 [email protected] Eugene Chua, CFA ● +65 6818 4809

Soybean tariffs to be implemented 6 Jul With 6 Jul nearing the corner (when China plans to impose 25% tariffs on US goods including soybeans), US soybean futures recently fell to a low of about US$842/bushel. At the current level of US$894/bushel (close on 22 Jun), prices are down about 15% from a month ago, and are likely to remain volatile. Wilmar (WIL) imports soybeans from the key producers and sells key products in China. The group makes from the spread between soybeans and its products such as soyoil and soymeal, and hence crushing margins affect earnings. If soybean prices were to rise in China, prices of soybean meal (currently used mainly as animal feedstock) and soybean oil are likely to rise too. Substitutes of soy meal such as corn meal will see higher demand; WIL trades in this too, but to a lesser extent. Crude palm oil and rapeseed oil are substitutes of soy oil and the group has a greater exposure to these. We would also monitor the utilisation levels of the group’s crushing plants in China, which remained high (more than 80%) as of a month ago. According to management, even though performance of its oilseed crushing business will not be affected in the short term, a prolonged standoff between China and the US would impact the utilisation of its crushing plants.

[email protected]

Monitoring what happens after Aug China, the world’s largest soybean buyer, can afford to implement tariffs this summer, as they have Brazil’s record harvest to help supply their needs. Brazilians gather in their soybean crops from Feb through May while US soybeans are harvested from late Sep through Nov. After Aug/Sep, when Brazilian harvests are mostly exported, international buyers most likely have to turn to more US supplies. Wilmar is currently already sourcing soybeans from South America including Brazil and Argentina in the face of the tariffs.

Wilmar International

CPO prices remain lacklustre As mentioned in our earlier report (8 Mar 2018), CPO prices are expected to remain lacklustre, and at RM2,283/MT (22 Jun close), the commodity is trading at its lowest since Mar 2016. Meanwhile, WIL remains our preferred pick in the sector with its more diversified operations. Companies in which Mr. Kuok Khoon Hong, is deemed interested in, have continued to purchase WIL shares – a total of about 8.8m shares at a weighted average of S$3.10/share since late Feb.

Please refer to important disclosures at the back of this document.

Relative total return

1m

3m

12m

Sector (%)

-3

-5

-11

STI-adjusted (%)

4

-2

-15

Price

Fair Value

Rating

S$3.09

S$3.51

BUY

S$0.325

S$0.34

HOLD

Price performance chart

Sources: Bloomberg, OIR estimates

Industry-relative metrics Company

Golden Agri-Resources

OCBC Investment Research Singapore Equities

Exhibit 1: Breakdown of pre-tax profit for WIL

Profit before tax Tropical Oils Oilseeds and Grains Sugar Others Share of results of joint ventures Share of results of associates Unallocated expenses Total

Exhibit 2: Breakdown of EBITDA for Golden-Agri

FY17 27% 46% -2% 15% 2% 12% -1% 100%

EBITDA Plantation and palm oil mills Palm and laurics Oilseeds Others Total

Source: Company, OIR

FY17 75% 24% 1.2% 0.3% 100%

Source: Company, OIR

Exhibit 3: Cons. forward P/E, P/B and Div yield for WIL

(x)

16 14

12.8

12

11.9

10

11.1

8

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

WIL SP Fwd P/E

Average

+1 SD

-1 SD

1.2 1.03

(x)

1.0

0.95 0.87

0.8 0.6

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

WIL SP Fwd P/B

Average

+1 SD

-1 SD

4 3.1

(%)

3

2.7 2.3

2 1

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

WIL SP Fwd Div Yield

Average

Source: Bloomberg

2

+1 SD

-1 SD

OCBC Investment Research Singapore Equities

Exhibit 4: Cons. forward P/E, P/B and Div yield for GGR

(x)

23 18

17.1

13

14.8 12.4

8

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

GGR SP Fwd P/E

Average

+1 SD

-1 SD

1.0

(x)

0.8

0.8 0.6

0.6

0.5

0.4 0.2

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

GGR SP Fwd P/B

Average

+1 SD

-1 SD

4

(%)

3

2.8 2.4 2.1

2 1

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

GGR SP Fwd Div Yield

Average

Source: Bloomberg

3

+1 SD

-1 SD

OCBC Investment Research Singapore Equities

SHAREHOLDING DECLARATION: For shareholding disclosure on individual companies, please refer to the latest reports of these companies.

DISCLAIMER FOR RESEARCH REPORT This report is solely for information and general circulation only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without the written consent of OCBC Investment Research Pte Ltd (“OIR” or “we”). This report should not be construed as an offer or solicitation for the subscription, purchase or sale of the securities mentioned herein or to participate in any particular trading or investment strategy. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. In the event that you choose not to seek advice from a financial adviser, you should consider whether investment in securities and the securities mentioned herein is suitable for you. Oversea-Chinese Banking Corporation Limited (“OCBC Bank”), Bank of Singapore Limited (“BOS”), OIR, OCBC Securities Pte Ltd (“OSPL”) and their respective connected and associated corporations together with their respective directors and officers may have or take positions in the securities mentioned in this report and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally. The information provided herein may contain projections or other forward looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Privileged / confidential information may be contained in this report. If you are not the addressee indicated in the message enclosing the report (or responsible for delivery of the message to such person), you may not copy or deliver the message and/or report to anyone. Opinions, conclusions and other information in this document that do not relate to the official business of OCBC Bank, BOS, OIR, OSPL and their respective connected and associated corporations shall be understood as neither given nor endorsed.

RATINGS AND RECOMMENDATIONS: - OIR’s technical comments and recommendations are short-term and trading oriented. - OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. - As a guide, OIR’s BUY rating indicates a total expected return in excess of 10% based on the current price; a HOLD rating indicates total expected returns within +10% and -5%; a SELL rating indicates total expected returns less than -5%. - For companies with market capitalisation of S$150m and below, OIR’s BUY rating indicates a total expected return in excess of 30%; a HOLD rating indicates total expected returns within a +/-30% range; a SELL rating indicates total expected returns less than -30%. Co.Reg.no.: 198301152E Carmen Lee Head of Research For OCBC Investment Research Pte Ltd

Published by OCBC Investment Research Pte Ltd

Important disclosures

soft commodities sector | neutral

2 days ago - Rating. Wilmar International. S$3.09. S$3.51. BUY. Golden Agri-Resources. S$0.325. S$0.34. HOLD. Soybean tariffs to be implemented 6 Jul.

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