Wilmar

Wilmar: CLSA recommends a Strong Sell on Wilmar with $4.95 TP, headlining grp’s operations as ‘Crushed in China’. Note that Cofco’s profit warning cautions against any positive read through that strong numbers for international agriculture producers such as Cargill may have for its peers like Wilmar, which have large exposure to China….

Recap that Cofco issued a profit warning on Fri that 2H10 earnings was expected to decrease by 37%YoY, with full-year earnings down 13%YoY. Decline is due mainly to losses on its oilseeds futures contracts. Margins for Cofco’s branded package rice business was also negatively impacted by higher raw material input costs and significant spending in marketing, sales and distribution, as the company sought to increase market share….

Add that Cofco is Wilmar’s closest peer in China, with Wilmar as China’s largest oilseeds crusher and is actively growing its branded consumer pack rice and flour business, while Cofco is China’s second-largest oilseeds crusher, with businesses in biofuels, rice trading/processing, brewing and wheat processing as well. The price performance of both stocks is closely correlated, with an R-squared of 0.75 in the three years since 2008….

Highlight that weak consumer rice margins underscore the tough competition in branded rice, which has been tipped to be a growth driver for Wilmar. This suggests that it may take longer for the business to meaningfully contribute to earnings and property diversification for Wilmar remains a negative, as it raises concerns on the use of capital in non-core areas, and sets a dangerous precedent for investments that are unrelated to its agri-business…..

Recommend investors switch into Noble or upstream CPO names. Management has been guiding down 4Q earnings in the oilseeds and consumer pack oil business, and do not expect a strong qtr for Wilmar. Wilmar is scheduled to report full-year results on 23rd Feb.