Wilmar

Wilmar: A foreign research house initiated coverage on Wilmar with a Sell rating and a TP of $2.27, suggesting a potential downside of 18.1%. Wilmar is the latest SGX-listed commodity-linked counter to come under scrutiny after Noble.

The lone Sell call hinges on the house’s belief that Wilmar’s capex programme has delivered poor returns and that its core refining business is under threat from overcapacity.

The house notes that Wilmar has spent over US$6.5b in capex over the past five years, including a US$2.6b investment in its palm & laurics segment (46% of FY14 revenue), which added an additional 9m MT of capacity.

Based on its calculation, Wilmar spent ~US$205/MT of capacity as opposed to the industry norm of US$150/MT. The premium is difficult to defend as margins in the processing industry is falling.

To substantiate this claim, it points to Wilmar’s diminishing returns on invested capital (ROIC), which averaged 5.2% over the past five years, well below its average WACC of 6.8%. The house reckons Wilmar’s ROIC will continue to be capped by the current oversupply of palm oil and soybean processing in the region.

It also highlights that processing margins across the industry have been compressed due excess capacity, which resulted in Wilmar’s processing margin declining 28.4% from FY12's US$33.4/MT to US$23.90/MT in FY14.

Consequently, it reckons Wilmar’s earnings have been largely driven by trading gains instead of processing profits. Evidence of this stems from the wide disparity between estimated CPO margin of US$8/MT and Wilmar's palm & laurics pretax margin of US$17-US$29/MT over FY13-14.

Another notable red flag is its high net gearing of 89.6% as at end FY14.

Taken in totality, the above factors imply that Wilmar is trading at a 36% premium to the sector average, at 14x FY15e EV/EBITDA and 11x FY15e P/E.