Wednesday, January 29, 2014


Wilmar - Co. has been pretty quiet on the corporate front, although we note that recently Sugar prices fell to a 3 ½ year low late last week, as strong global production added to a global glut. Sugar futures for delivery in Mar fell to US$0.1513 a pound, the lowest level since Jun’10. Meanwhile, Brazil, the world’s largest producer and exporter of sugar, crushed more cane versus the prior year, and Thailand, the second largest sugar exporter, also recorded robust output. SGX’s largest commodity trader Wilmar, has significant exposure to sugar. The segment accounted for 8.5% of the group’s pretax profit in 3Q13 (albeit partially overstated due to seasonality patterns). The current global excess capacity of sugar and plunge in prices may put a dampener on Wilmar’s sugar operations and earnings, notwithstanding the hedging strategies implemented by the group. Moreover, Wilmar is currently in the midst of finalizing the purchase of a 25% stake in Shree Renuka Sugars, India’s largest sugar refiner, and is tipped to inject up to Rs7.4b (US$120m) of fresh equity into Renuka, assuming the deal is priced at the high end of the indicative issue price of Rs30-33 per share. Nevertheless, Wilmar’s recent share price weakness may reflect investors’ unhappiness with the deal valuations. With Renuka shares last traded at Rs21 on the Bombay Stock Exchange, this means Wilmar would be effectively paying a hefty 30+% premium for a non-controlling stake. Longer term however, Wilmar (Buy, TP $4.30) remains Maybank-KE’s top pick in the commodity sector because of its superior earnings visibility, and strong balance sheet, which makes it the least vulnerable to a shrinking global liquidity and rising cost of debt. Today's rise could perharps be sparked off by some bargain hunting amongsts investors.

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