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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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Published by OCBC Investment Research Pte Ltd
Important disclosures