Wilmar to boost profit as China lifts price caps for retail vegetable oils

Assuming a 6-month impact, the company could now gain around US$15m, says CIMB.

The removal of price caps will now allow Wilmar to raise its retail prices of packaged cooking oils. The company hasn't raised prices since October 10 due to the price caps.

Here's more:

Price controls in China lifted
According to Reuters, China has lifted price caps for retail vegetable oils. The removal is a nice surprise and could boost the profitability of Wilmar’s consumer products division in 2H11. This is because Wilmar would now be able to raise the retail prices of its packaged cooking oils to pass on higher feedstock costs and restore its profit margins.

There is no change to our earnings forecasts pending confirmation of this news. We estimate that for every US$10/tonne increase in pretax margins for the consumer products division, Wilmar’s profit could gain by 1% or around US$15m, assuming a 6-month impact. Also intact is our target price of S$6.20, based on 16x forward P/E and Outperform rating. Potential re-rating catalysts are this news and stronger-than-expected earnings.

Comments
We are yet unable to verify this news with the company. The removal of the price caps should be positive for Wilmar, allowing it to raise its cooking-oil prices and restore profit margins for this division. Wilmar has not raised the prices of its branded cooking oil products since Oct 10 due to the price caps.

Wilmar is the largest owner of branded packaged edible oils in China, with about 45% share of the branded edible oils market in China in 2010. It derived 11% and 9% of its pretax profits from its consumer packs division (which comprises mainly branded cooking oil sales in China) in 2009 and 2010, respectively.

Pretax margins for this division had been pinched by price controls in 2008 and since 4Q10. Since Dec 10, the Chinese government had been restraining cooking-oil producers from raising their cooking-oil prices as part of its efforts to address inflation.

To provide relief to the producers from rising feedstock costs, the government had been selling state reserves of soybeans to these producers at below international market prices. It is yet unclear whether the producers would be required to obtain government approval for raising their cooking-oil prices following this lifting.

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