Higher CPO production to drive Wilmar’s earnings in 3Q11

Palm & Laurics–Margins to remain firm
Wilmar is the world’s largest palm merchandiser and processer. It merchandised and processed 20.8 MT of palm products in 2010 and holds a 30% global market share in oil palm processing. Wilmar’s plantations supply only approximately 8 to 10% of its total CPO needs.

We believe Wilmar’s margins in this segment are really dependent on a myriad of factors; they include 1) soy/palm oil price differential, 2) its positioning in the value chain 3) availability of CPO supply and 4) its ability to manage its trading books.

Plantations & Palm Oil Mills-We expect higher production from Wilmar’s oil palms over the next 3 years as a higher proportion of its plantation reaches the prime age of 7-18. The age of 7 to 18 is when palm trees are most productive and we estimated that percentage of the number of palm trees entering this age group would be higher over the next 3 years compared to previous years. We arrive at this conclusion by studying the age patterns of Wilmar’s plantation in the past 4 years.

Oilseeds & Grains and Consumer Products - The recent lifting of price caps on cooking oil by the Chinese government should improve Wilmar’s crushing margins and sales volume in the short term. Thanks to a sharp fall in soybean prices in September, soybean prices on average in 3Q11 has remained relatively unchanged compared to 2Q11.Therefore, given that Wilmar raised cooking oil prices in August, this should result in better margins. Indeed, back-to-back crush margins in China have improved significantly since June 2011, supporting our view that Wilmar’s crush margins should see improvement going forward.

Sugar-moderate performance to continue in 2011
1H2011 saw a loss before tax of US$72 million from milling operations and profit before tax of US$58 million from refining businesses. Together, the sugar division turned in a loss before tax of US$14million. The poor results in milling were mainly due to lower quality standover cane from last season that resulted in lower extraction rate and a crush season that has yet to commence fully.

Valuation
We arrive at a target price of $4.47 for Wilmar based on our sum-of-the-parts methodology. We value Wilmar’s plantation and palm oil mills business based on 2.5x book value and its palm & laurics, oilseeds & grains, consumer products and sugar businesses based on 10x/5.5x/20x/11x FY12e earnings respectively. Finally, we value its share of associates and other businesses at 10x FY12e earnings.