Wilmar

Wilmar: CLSA maintains Sell with $2.87 TP. House note that 3Q12 core PATMI of US$388m driven sugar’s contribution and a reversal to profits in its soy crushing segment. Its plantation segment saw weak production as drought holds back M’sia production. Good refining margins in Indonesia supported the palm refining segment’s PBT/t at a stable US$31. Whilst soy crushing was profitable this quarter, remain concerned about the sustainability of it given structural woes in the industry. With volatility expected in earnings, maintain SELL. UBS note that quarterly earnings growth share price supportive Wilmar improved earnings in most of its primary businesses in the third quarter due to better industry fundamentals, such as a soybean crush margin reversion to positive territory, strong sugar volumes, and a consumer margin increase.However, structural challenges could continue to weigh on earnings in the near term.Strong sugar results are likely to carry into the fourth quarter and 2013, while palm refining volumes should pick up in 2013 from the completion of new capacity in Indonesia. The reversion to soybean crush profitability in Q3 remains the wild card, as earnings appear to be primarily driven by trading profits. Note however that Wilmar’s two largest divisions, Plantations and Palm & Laurics, are likely to see margins decline in the near-to-medium termdue to falling CPO prices and overcapacity. Moreover, we reiterate our view that none of Wilmar’s businesses should trade above 15x PE, while thecurrent valuation is under pressure from growing trading profits/(losses) below 5x PE. Thus, think the share price is fairly valued, and highlight thatWilmar’s return on capital has remained below its cost of capital since 2010.