Wilmar International swamped with high inventory and delays

FY11F-13F earnings revised by -9% to +6%. We lowered the group’s Palm & Lauric M&P pretax margin slightly to US$29/MT from US$30/MT as we expect high inventory carried forward from end Sep11 to erode margins in a declining price environment in 4Q11. We have also adjusted our estimates of the group’s Plantations segment to account for the impact of new Indonesian export tax which was previously underestimated, while sugar segment EBITDA was adjusted on added merchandising volume. Proserpine is now included from FY12 onwards. This results in slightly higher FY12F operating expenses for the segment, although EBITDA is still forecast to jump by 78% YoY to US$198m on better yields and full contribution from Duta Sugar International. 

High cost of inventory may drag 4Q11 Palm & Lauric M&P. Based on our revised forecast, Wilmar should book 4Q11 net earnings of US$460m (+290% YoY,+4% QoQ) on recovery in crush margin and consumer pretax margin, offset by slightly lower sugar contribution. Palm & Lauric M&P pretax is still expected to rise QoQ on seasonally higher volumes and Indonesia’s wider export tax spread. However, we should note that Wilmar’s inventory at end Sep11 remained flat QoQ. With palm oil prices declining since 3Q11, we believe this may undermine the group’s 4Q11 palm oil refining margin when higher 3Q11 feedstock costs are taken into account.

Maintain Hold. While Wilmar is aggressively expanding its oleochemicals capacity in East Java, we believe the group’s sugar plantations in Papua (not included in our forecast) could face further delays. Our revised TP now implies FY12F PE multiple of 14.9x, with 3-year earnings CAGR of 19%. At current price, we believe Wilmar’s decent long-term prospects are already priced in. Hence, we advise to accumulate on dips.