Wilmar looks to rice and flour to offset soybean business weakness

It is looking to grow its rice and flour segment, which accounts for 10% of the oilseeds and grains.

The first quarter of 2018 was like a drought for Wilmar International as its profits were down by 40.6% to $203.28m. The company blamed the difficult operating environment in tropical oils businesses and warned the US-China tensions will continue to affect its soybean business.

Despite this, analysts are bullish that the company will pull through. OCBC Investment Research analyst Low Pei Han noted that Wilmar could rely on its other businesses to support it whilst operations in its soybean business in China are difficult.

“We estimate that the rice and flour business currently accounts for more than 10% of the oilseeds and grains segment, but management aims to grow this segment which has relatively more stable margins,” she said.

“The higher volatility in soybean prices offers opportunities to better position its raw materials,” said CGS-CIMB analyst Ivy Ng.

RHB Research analyst Juliana Cai noted that CEO Kuok Khoon Hong seems fairly confident on the prospects of the crushing business this year. “As we are still in the summer season, the group is currently buying from South American sources. Hence, even if a tariff on soybeans is implemented over the next month, the group is not likely to be affected in the near term. The utilisation rate of the crushing segment remains high, ie above 80% in 2Q2018,” she added.

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Meanwhile, Wilmar’s weak tropical oils segment is likely to perform better in the following quarters. “The tropical oils division will benefit from a higher refining margin in Malaysia and demand for biodiesel due to higher crude oil prices,” Ng said.

Low concurred and said production for this year may be about 10% higher with more favourable weather, and refining margins may improve in the next few quarters.

“With the end of duty-free crude palm oil (CPO) exports in Malaysia and CPO supply improving seasonally in 2Q18, management said that its refining margin should improve in the current quarter,” Cai said.

The three also agreed that Wilmar’s sugar milling business in Australia likely to pick up next quarter. Cai noted that it was hit by the timing effect from the new Australian sugar marketing programme. “Under this programme, sales in 2H2017 were weaker, as a proportion of sugar sales was supposed to be deferred to 1H2018,” she explained.

Lastly, Ng said investors could watch out for Wilmar’s listing in China. “We gathered that the max price-to-equity (P/E) allowed for a new listing in Shanghai was 23x. Given our estimate for the business’s 2017 net profit of US$680m, Wilmar China could be worth US$12.2b to US$15.7b, based on 18-23x P/E, against the group’s current market cap of US$15b.”

Low also brought up that the group remains on the lookout for acquisition opportunities. Joint venture firm Adani Wilmar has put in a bid for debt-ridden edible oil firm Ruchi Soya.