Palm oil is the most versatile edible vegetable oil on the earth. It is used as an ingredient in half of the products you could find in our supermarket. From edible biscuits to personal care or cosmetic products, you can bet that there are traces of palm oil extract. Notwithstanding its applications in consumer products, palm oil is also a renewable resource for biodiesel and biofuel and is a substitution for fossil fuels like crude oil.
Wilmar International (Wilmar), an agribusiness giant listed on Singapore Exchange, is also one of the world’s largest palm oil cultivator and processor. In the latest quarter, Wilmar delivered a better-than-expected performance. We take a closer look to find out if the group could sustain its performances in the coming quarters.
Good Earnings Despite Political Uncertainty
In 2Q18, Wilmar registered a marginal 1.9 percent rise in revenue to US$10.8 billion attributed to higher sales volume and commodity prices from the Oilseeds and Grains businesses, partially offset by lower commodity prices in both Tropical Oils and Sugar segments.
Oilseeds and Grains segment saw the greatest growth in pre-tax profit, with a 381.2 percent jump to US$290.2 million on the back of higher sales volume and improved crush margins as well as strong performance from its Consumer Product division. The demand for consumer products also remained strong, demonstrating a 13.1 percent growth in revenue.
Its tropical oil segment marks the second largest earnings growth driver in 2Q18, posting a 164.9 percent increase in pre-tax profit to US$154.9 million arising from better midstream and downstream performance which trumped over lower crude palm oil (CPO) prices. Meanwhile, higher crude oil prices benefitted the demand and margins for Oleochemicals and Biodiesel. Apart from that, Specialty Fats segment also contributed positively owing to higher global demand. Plantation production yield continued to improve 11.1 percent to 5.8 metric tonnes per hectare on favourable weather condition. However, sustained low CPO prices weighed on its upstream plantation earnings.
For the Sugar segment, pre-tax losses were halved to US$46.2 million, thanks to a new Australian sugar marketing programme introduced in 2017, as well as general better performance from the merchandising and processing operation.
Overall, though the second quarter is seasonally and historically Wilmar’s weakest quarter, however, Wilmar has delivered its best ever core net profit since 2011, an almost tenfold rise to US$351.8 million from 1H17.
On A Positive Foothold
Going forward, Wilmar would continue to benefit from the sharp decline in soybean prices amid the US-China trade tensions. The reduced raw material costs helped to turn around weak crush margins in 2Q18 and should sustain into 3Q18 as China has adequate soybean supplies and inventories to last for a few months. However, Wilmar is unlikely to take big position on soybeans, given the uncertainties of a trade war could negatively impact crush margins due to lower plant utilisation.
With the commencement of Sugar crushing season in June, an increase in sales volume for the sugar milling business in 3Q18, arising from the Australia sugar marketing programme is widely anticipated. However, performance could be dragged down by low sugar prices and consolidation of losses from Renuka Sugar subsidiary, after Wilmar increased its stake from 38.6 percent to 58.3 percent.
As one of the largest downstream player in palm oil processing, Wilmar will also benefit from rising demand for downstream products like biodiesel as higher utilisation rate would further prop up refining margins. Meanwhile, Indonesia’s B20 policy to impose 20 percent biodiesel blending to non-subsidised diesel fuel in 2017 continues to raise domestic consumption for biodiesel. In addition, the EU’s elimination of anti-dumping duties on Indonesia biodiesel in March 2018 will further prop up demand.
Apart from its operations, Wilmar is expected to file for its China operations for listing in FY19. China operations contribute approximately 50 percent of Wilmar’s revenue and the potential IPO will unlock value for investors.
Raising Dividend- A Positive Signal
In 1H18, Wilmar had increased its total borrowings from US$19.8 billion to US$23.4 billion in the last six months. However, the current cash and bank balances stood at US$2 billion, translating to a net debt position of US$21.4 billion, representing a total debt-to-equity ratio of 146.6 percent or net debt-to-equity ratio of 133.8 percent, making it a highly-levered company. However, Wilmar should be able to meet its debt obligations comfortably given that it has a current ratio of 1.1 times and EBITDA coverage ratio standing at 5.1 times.
In a show of confidence, Wilmar raised its interim dividend by $0.005 to $0.035 per share, with management further indicating that final dividend will also be slightly higher than last year.
Wilmar is currently trading at 11.1 times to earnings and 0.9 times to book value. While valuations are comparable to industry peers, we are positive on Wilmar for its proposed plan to list its China operations, as this should unlock value for the stock.