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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

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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