Here's what's souring Wilmar's second-half outlook

Margins are on a worrying decline.

Wilmar's key palm oil segment will continue to be hit with the low CPO price and declining refining margins in Indonesia, which will drag down its Palm and Laurics division and plantation business, OCBC noted.

But a few silver linings for the second-half of 2013, including lower raw material prices in the downstream business, should offset the weakness upstream.

Here's more from OCBC:

1H13 results slightly below forecast. Wilmar International Limited (WIL) saw its 2Q13 revenue fall 5.4% YoY (+2.2% QoQ) to US$10426.3m, weighed by lower CPO prices (but alleviated by volume growth in other segments). While net profit jumped 86.5% YoY to US$218.5m (mainly due to the loss in its Oilseeds & Grains segment in 2Q12), it was still down 30.7% QoQ, likely hit by lower crushing margins in the quarter. For 1H13, revenue slipped 4.0% to US$20626.8m, meeting 41.5% of our full-year forecast, while net profit climbed 43.1% to US$533.9m, or about 40.1% of our FY13 forecast. WIL declared an interim dividend of S$0.025/share, versus S$0.02 in 1H12.

Outlook still quite mixed. Going forward, WIL notes that the overall environment remains “challenging”, but it remains cautiously upbeat that it can continue to see a seasonally stronger second half performance. For the palm oil segment, the low CPO price and declining refining margins in Indonesia are likely to affect its Palm and Laurics division as well as plantation business. However, its downstream products will benefit from lower raw material prices, thus mitigating some of the upstream weakness. Management adds that its recent investments in the sugar business and expansion into oleochemicals and specialty fats will have positive contributions, albeit over the medium to long term.

Maintain HOLD with higher S$3.33 fair value. As 1H13 results were slightly below forecast, we pare our FY13F earnings by 6.7% (FY14F by 3.6%). But as we roll forward our unchanged 12.5x peg to blended FY13/FY14F EPS, our fair value inches up slightly from S$3.25 to S$3.33. In view of the still difficult operating environment and the credit crunch in China, we maintain HOLD and would be buyers at S$3.10 or better.