Wilmar International Limited - Outperformance overdone

UBS Investment Research
􀂄 Downgrade from Buy to Neutral; fairly valued despite EPS upgrade
Wilmar International’s (Wilmar) share price has risen 52% from a low of S$3.60
on 18 March 2008, and we believe it is now fairly valued. This is despite raising
our EPS forecasts for 2008 from US$0.15 to US$0.19 and for 2009 from US$0.17
to US$0.21. Our forecasts are now 18-25% above consensus and our new EPS
estimates follow on from better-than-expected Q108 results reported on 13 May.

􀂄 The sustainability of crushing and refining margins is uncertain
We think the unusually high processing margin in Q108 is unsustainable. Although
some of the margin expansion could be attributed to merger synergies and
increased economies of scale, a greater part was caused by stock-holding gains and
the foreign currency effect.

􀂄 Long-term Chinese food demand investment case is intact
We think there is strong upside to Chinese edible oil and soybean demand. China’s
per capita consumption of edible oil and meal was 23kg/capita and 36kg/capita,
respectively, in 2007, 30-40% of developed countries’ consumption. Chinese
imports of palm oil and soybeans recorded a CAGR of 16% and 21%, respectively,
from 2002-07. Wilmar’s 20-25% market share of the Chinese soybean crushing
market and 40% share of palm oil refining capacity imply it is best positioned to
benefit.

􀂄 Valuation: raise sum-of-the-parts-based price target from S$4.55 to S$5.90
Our sum-of-the-parts price target is derived using a DCF methodology, assuming a
WACC of 8.5%, long-term growth of 4% and a long-term CPO ASP of
US$900/tonne for plantations, and a WACC of 8.5% and long-term growth of 5%
for China. At our price target, Wilmar would trade at a 2009E PE of 21x.