Why Wilmar won't be spared by China woes

But profits seen to improve in 2H.

According to OCBC Investment Research, the recent rise in short-term interest rates in China could raise the cost of business for Wilmar and its customers.

Here's more:

Over in China, while industrial production numbers improved somewhat (HSBC’s PMI reading for Oct came in at a 7-month high of 50.9), market watchers remain largely cautious about the sustainability of the growth as structural issues like inflation remain.

Concerns that the Chinese government would further tighten liquidity to curb rising price pressures usually does not bode well for WIL as Beijing could also impose caps on prices of essential food items like cooking oil.

Staged 14% rebound since upgrade. Wilmar International Limited’s (WIL) share price has done very well since we upgraded our rating to Buy on 6 Sep, rising as much as 14% to a recent high of S$3.50. The stock is also up as much as 16% from its recent S$3.02 low.

As the current price is also 4% above our S$3.33 fair value (still based on 12.5x blended FY13/FY14F EPS), we downgrade our call to HOLD on valuation grounds. We also do not see any strong near-term catalysts to justify a re-rating before its 3Q13 results due 7 Nov.

Better 2H performance likely priced in
No doubt that WIL tends to perform better in the second half, aided by the seasonality of its sugar business in Australia. This as the outfit will typically reverse from a lossmaking position to a highly profitable one.

However, we believe that this is largely priced in. Note as well that sugar prices are still somewhat below the prices seen in 3Q12. At best, we are probably looking at comparable YoY performance. While CPO prices are generally off the lows, we note that the average price in 3Q13 is still about 2% lower QoQ and almost down 22% YoY.