Wilmar acquisition sweetens stock outlook

Proserpine Sugar Mill purchase and low share price lead OCBC to upgrade call to Hold.

Last November OCBC downgraded its outlook to Sell due to a global slowdown that threaten to cap demand and prices.

But a recent creditor vote approving its Proserpine Sugar Mill deal via Australian unit Sucrogen, growing Wilmar's sugar production capacity and production in that country.

Still, any positive effect will be constrained to the second half of 2012 and could even be blunted if economic conditions even worsen then.

Here's more from OCBC:

Finally nets Proserpine. Wilmar International Limited has recently announced that its Australian unit Sucrogen has finally completed the acquisition of Proserpine Sugar Mill; this after a majority of Proserpine creditors, by number and value, voted to approve Sucrogen's purchase of the mill. Sucrogen's offer comprised a headline price of A$120m, plus a working capital adjustment, normal settlement adjustments, as well as absorption of the mill's normal operating costs and certain critical capex incurred from 31 Oct 2011. Proserpine is Australia's fifth largest sugar milling company; the latest deal would see Sucrogen owning eight of the 24 operating mills in the country. We note that the move will also increase Sucrogen's annual capacity by 2m tonnes to 17m tonnes, while its raw sugar production will grow by 10% to 2.2m tonnes.

Strategic fit but impact likely felt in 2H12. As before, we think that Proserpine would be a good strategic fit for Sucrogen. However, if Sucrogen's seasonality is any indication, we could continue to see pretty weak operating numbers in 1H12; hence any boost would come only in 2H12, and should we see a sharp global economic slowdown, that boost could also be blunted by weaker sugar prices. Previously, management has guided for Sucrogen to provide an EBITDA of US$100m for 2011, which is still quite small compared to its overall business.

China's inflation is easing; but growth is also slowing. Separately, China's inflation has started to come off in recent months, easing to 4.2%, just slightly above the government's 4% target. This suggests that WIL will not face any more "unofficial price caps" on essential food items like cooking oil. But we feel that this is a moot point because it is highly unlikely that WIL would want to raise its selling prices amidst a rapidly cooling economy. Meanwhile, we expect its oilseeds crushing business to continue to face pretty challenging times, as we understand that excess capacity in the market is still a big issue at the moment, often leading to very intense competition and price cutting.

Upgrade to HOLD. Since our downgrade on 9 Nov, its share price has tumbled some 12% to a low of S$4.91. But at current prices, we believe that more of the downside risk has been captured. Hence from a valuation basis, we are upgrading our call from Sell to HOLD, albeit with an unchanged fair value of S$4.78. We would only be buyers below S$4.50.