commodities report
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Please refer to the important disclosures at the back of this document.
Economic growth to bolster commodity demand in 2011.The global economic recovery in 2010 has fuelled demand forcommodities, sending the benchmark Reuters/Jefferies CRBIndex up 13% year-to-date. Market watchers expect the indexto continue its ascent in 2011, buoyed by growing demand forcommodities amid tight demand and supply fundamentals.
The International Monetary Fund expects global economiesto grow 4.8% in 2010 and a further 4.2% in 2011, led byemerging economies. It expects commodity prices to rise,driven by an upward shift in commodity demand owing toeconomic growth coupled with sluggish supply responses.
2011 earnings driven by organic and inorganic growth.Commodity-related companies within our coverage universeare expected to perform well against this backdrop. Thesestocks delivered an average gain of 12% YTD, slightlyoutperforming the Straits Times Index (STI's) 10% increase.We expect further outperformance in 2011 to be driven byearnings contribution from recent investments and acquisitions,many of which are nearing maturity. Tight underlying demandand supply fundamentals will also boost organic growth.
Extending dominance amid industry consolidation.Mergers and acquisitions were a recurring theme in 2010 ascompanies were quick to capitalize on investment opportunitiesbrought about by the economic downturn. We expect industryconsolidation to persist in 2011, especially since critical massis a key advantage in this industry. Smaller and less adequatelymanaged companies may eventually be marginalized as thelarger players extend their dominance.
Commodity price inflation and volatility necessitatestrong balance sheets. Commodity prices have undergone
wild swings of late and volatility may persist in the near termdue to supply shortage. Inflation and price volatility intensifyworking capital requirements. Strong balance sheets aretherefore crucial. Ready access to capital and agility incapturing opportunistic investments will be key differentiatingfactors that enable players to extend their dominance amidindustry consolidation, in our view.
Remain OVERWEIGHT. We remain OVERWEIGHT oncommodities as the continued economic recovery in 2011 willboost demand for raw materials. Within the sector, ourpreference lies with companies that have strong balancesheets, well-diversified business models and proven executiontrack records. Noble Group [BUY, fair value S$2.59] andOlam International [BUY, fair value S$3.53] are our preferredpicks within our coverage universe.
Seizing opportunities amid industry consolidation
Commodities
SINGAPORE Company Update Results MITA No. 010/06/2009
14 December 2010
Overweight
SINGAPORE Sector Update MITA No. 016/06/2010
Lee Wen Ching(65) 6531 9806e-mail: [email protected]
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STIWiIL
GAR
Noble Olam
SAR
Price Rating Fair FY11 FY11 Analyst
(10 Dec) Value PER DivYield
(S$) (S$) (x) (%)
Golden Agri-Resources 0.77 BUY 0.91 14.3 0.6% Carey Wong
Noble Group 2.12 BUY 2.59 13.9 1.8% Lee Wen Ching
Olam Int'l 3.10 BUY 3.53 21.2 1.2% Lee Wen Ching
Straits Asia Resources 2.45 BUY 3.13 10.0 6.0% Lee Wen Ching
Wilmar 5.95 HOLD 6.48 16.5 1.3% Carey Wong
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Page 2 14 December 2010
Sector Update
Page
Table of Contents
Section A Year in review 3
Section B The landscape in 2011 5
Section C Consolidation continues - Inorganic 8
growth to drive earnings
Section D Commodity prices to trend higher 10
Section E Risk factors 16
Section F Recommendation 17
Section G Company Profiles 19
Section H Disclaimer 33
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Section A: Year in review
Economic recovery has spurred higher commodity prices... 2010marked a positive year for commodities. With demand for commodities
being leading economic indicators, expectations of a global economic
recovery buoyed the outlook for commodities, sending the benchmark
Reuters/Jefferies CRB Index up 42% from its 2009 trough. Despite its
recovery, the index remains 35% below its 2008 peak levels and market
watchers predict a continuation of the index's climb in 2011.
Exhibit 1: Reuters/ Jefferies CRB Index, 2003 - present
Source: Bloomberg
as well as shares of commodity-related companies. Positive
sentiment surrounding physical commodities spilled over to commodity-
related companies. With the exception of Wilmar International (WIL), all
commodity-related stocks within our coverage universe posted year-to-date
(YTD) gains. The sector delivered an average gain of 12% YTD, slightly
outperforming the Straits Times Index (STI's) 10% increase.
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The Reuters/Jefferies C RB Index
tumbled by 54% during the 2008-2009 crisis and has y et to fully
recov er its losses.. .
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Exhibit 2: YTD performance of commodity-related shares vs. STI
Source: Bloomberg
Acquisitions and investments were a recurring theme . Companies
were quick to capitalize on investment opportunities brought about by the
economic downturn. Industry consolidation was rampant as companies
with strong financial muscle turned to inorganic growth strategies to increase
their market share at the expense of their less adequately capitalized peers.
Distressed assets were aplenty and acquisitions were sealed at generally
attractive valuations.
M&A to drive corporate earnings. While the global economic recovery
has reduced the availability of such opportunistic investments, we expect
investments and acquisitions to continue in 2011, albeit at a slower pace.
Meantime, earnings accretion from recent investments will drive profits in
2011. We have already seen companies such as Noble Group (Noble) and
Olam International (Olam) benefitting from higher volumes aided by pipelines
enlarged via investments and acquisitions, and we expect greater volumes
to flow through in 2011 as more investments approach maturity, thereby
boosting profits.
But policy risk could stall further gains. Commodity prices have
strengthened in 2010 and are poised for further gains in 2011 amid tight
demand and supply fundamentals. However, we see increased uncertainty
stemming from policy risk as nations attempt to curb inflation via price
controls. For instance, China has been reported to be deliberating price
caps on agricultural products and other essential food items. Such policies
could hurt commodity and food producers and supply chain managers alike,
as profit margins and volumes may come under pressure.
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Exhibit 3: Real GDP Growth
Source: IMF
Section B: The landscape in 2011
Global economic expansion led by emerging economies. TheInternational Monetary Fund (IMF) expects global output to expand by 4.8%
in 2010 and a further 4.2% in 2011. Growth will likely be driven by emerging
and developing economies - such as China and India - where the IMF has
forecasted GDP growth of 7.1% in 2010 and 6.4% in 2011. In contrast,
advanced economies are expected to recover at a more sluggish rate of
2.7% in 2010 and 2.2% in 2011.
Leading indicators such as industrial production and employment have
continued to rebound, with emerging economies leading the way. Consumer
confidence in advanced economies such as US, Europe and Japan remains
cautious, suggesting that global economic recovery will continue to be
spurred by emerging economies.
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Exhibit 4: Leading economic indicators
Source: IMF
Robust demand for commodities to boost prices. The global economic
recovery is widely expected to fuel demand for commodities, thereby
supporting commodity prices. Among the various asset classes, real prices
of oil and gold are expected to outperform over the next five years. Demand
growth for cyclically sensitive commodities such as metals may, however,
moderate as the boost to global manufacturing activity from the inventory
cycle wanes. While the IMF projects stable food prices over the longer
term, we note that crop prices have recently undergone wild swings owing
to irregular weather patterns which have resulted in supply shocks (amid
inelastic demand). This has elevated food inflation concerns.
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Exhibit 5: Commodity price projections
Source: IMF
China - a major driver. China has, and will continue to play a major role
in influencing global commodity markets, given the rapid increase in its
economy's share of global commodity demand over the past decade.
Moderating growth, or policy controls such as the introduction of price
ceilings on commodity prices, may restrain demand expansion and intervene
with free market forces.
Over-reliance on China as a main growth driver may subject companies to
concentration risk. Nevertheless, China remains too large a market to ignore,especially since GDP growth is projected to be among the highest in the
world at 10.5% in 2010 and 9.6% in 2011.
Size does matter. Companies sought to expand their market share via
inorganic growth strategies in 2010, and we expect this trend to persist in
an industry where critical mass is crucial. Industry consolidation will
continue to shape the industry in 2011. We believe that smaller and less
adequately managed companies will eventually be marginalised as the
larger players extend their dominance.
Risks. We remain sanguine on commodities-related stocks within ourcoverage universe and believe that they are poised to leverage on the global
economic recovery. Key risks that could derail the growth trajectory include
policy risk (including fiscal or monetary tightening, price controls and trade
restrictions), supply disruptions arising from unusual weather patterns, and
renewed stress on global economies.
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Section C: Consolidation continues - Inorganic growth to drive
earnings
Darwinian process will continue to unfold. Industry consolidation is
likely to be a recurring theme in 2011. In Noble's CEO Mr Ricardo Leiman's
words, "as the commodity business becomes more global and more capital
intensive, there will be some sort of Darwinian process that will take place.
It has been taking place since the financial crisis and will continue...
benefitting companies that have access to capital markets and can finance
its expansion and growth" As this process unfolds, we believe that smaller
and less adequately managed companies will eventually be marginalised
as the larger players extend their dominance.
Benefits of consolidation. In our view, industry consolidation presents
several benefits, especially to supply chain managers where profits are
driven by volumes. These include critical mass and economies of scale,
access to complementary products and new markets, as well as cost and
channel synergy. Increasingly, supply chain managers have also been
taking stakes in upstream assets in a bid to secure supplies and to tap on
rising commodity prices. Competition for upstream assets may heat up
should supplies become constrained in 2011.
Singapore-listed commodity firms have been capitalizing on
opportunistic investments. Supply chain managers Noble and Olam have
embarked on a series of investments (both greenfield and brownfield) and
acquisitions in 2010 and we expect more to come in 2011. Olam's ongoing
discussions with French conglomerate Louis Dreyfus for a "possible
collaboration" is one of the more closely watched deals in this space. The
company remains in confidential negotiations and has not disclosed further
details since its initial disclosure in Sep. Other recent investments recently
announced by Olam include the setting up of a sugar refinery in Nigeria, as
well as the construction of a fertilizer complex and development of palm
plantations in Gabon. These investments are expected to boost Olam's
scale and profitability in the medium term.
Similarly, Noble has spent US$2.8b investing in upstream assets, production
expansion, fixed asset construction and acquiring new businesses since
2007. Its string of investments includes Sempra Energy Solutions, which
is expected to start contributing to earnings in 4Q10, as well as expansion
of its oil and gas division. These should build a larger volume and revenue
base to support the group's sustained long term growth.
Meanwhile, WIL has also jumped on the bandwagon, acquiring palm oil
plantation assets in Indonesia and Africa, infrastructure in the form of four
new bulk carriers and other food related assets. The most noteworthy is its
A$1.75b acquisition of Australian-based Sucrogen - one of the largest cane
sugar producers in the world - to jumpstart its ambition to expand into the
sugar industry.
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Last but not least, Golden Agri-Resources (GAR) acquired the entire
business of Florentina International Holdings (FIH) - a manufacturer of snacknoodles, instant noodles and ice sticks in the PRC which also owns eight
production plants in seven provinces - for US$142.8m. According to GAR,
the acquisition will allow it to leverage on the market knowledge, customer
base and extensive distribution channels of FIH's food business in China,
especially for its consumer pack oil and specialty fats business. Separately,
it is also looking at investing in large-scale cultivation of sustainable oil
palm plantations and related downstream activities in Liberia which could
run up to US$1.6b over the next 20 years.
Inorganic growth to fuel performance in 2011 and beyond. Noble's
and Olam's pipeline investments are starting to bear fruit as they approachmaturity, and we expect them to boost earnings in 2011 and beyond. For
instance, Olam's performance in FY10 was driven mainly by higher volumes
from acquired businesses, where volumes jumped 42.0% as compared to
a relatively modest 18.7% volume growth from existing businesses.
Similarly, Noble has new assets operating coming on stream from 4Q10
and these should boost the group's pipeline capacity, and in turn, volume
and earnings.
Access to capital remains a key ingredient to success; large
commodity traders such as Noble and Olam hold competitive edge.In view of continued industry consolidation in 2011, strong balance sheets
and access to capital are likely to be key differentiating factors. In this
respect, large commodity traders such as Noble and Olam are likely to
have a competitive advantage from implied support from their strategic
investors China Investment Corporation (CIC) and Temasek Holdings,
respectively. In addition, both have proven to be successful in tapping capital
markets. We expect them to be at the forefront of industry consolidation.
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Exhibit 6: Reuters/ Jefferies CRB Index, year-to-date
Source: Bloomberg
Section D: Commodity prices to trend higher
Upward pricing pressure to persist... Commodity prices have risen by
13% YTD and are expected to continue trending higher in 2011, buoyed by
the improving global macroeconomic outlook, tight demand and supply
fundamentals, quantitative easing policies, potential weakness in the USD,
and low interest rates.
According to the IMF, commodity prices are projected to remain high by
historical standards over the medium term. The upward shift in commodity
demand growth is expected to be sustained as global growth continues to
be driven by emerging economies. A sustained upward shift in commodity
demand can lead to increases in real commodity prices because of sluggish
supply responses, given long lags for exploration and investment.
implying a favourable operating environment. The IMF projects
modest appreciation in the prices of energy, metals and food over the next
two years. Higher commodity prices imply favourable underlying dynamics
and generally bode well for all commodity-related companies under our
coverage universe. Note, however, that supply chain managers such as
Noble and Olam do not take outright price exposure. Earnings are driven
by volume. Nevertheless, earnings and profit margins tend to be correlated
to commodity prices.
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Exhibit 7: IMF's projection of commodity prices
Source: IMF
Exhibit 8: CBOT wheat futures
Source: Bloomberg
Volatility may persist in the near term. Commodity prices have been
volatile of late and this situation could persist in the near term. Prices of
soft commodities such as wheat, soybean, corn, cotton and sugar recently
surged to 52-week highs on supply shortage. Low inventory levels are
expected to spur restocking, thereby driving demand higher. At the same
time, unusual weather patterns has affected upstream producers and
crimped supplies. A combination of these factors may exacerbate near
term price volatility.
Price volatility presents a double-edged sword. On one hand, supply
chain managers such as Noble and Olam may be able to command a
higher counterparty premium given their scale and superior delivery fulfillment
versus smaller players, while upstream producers may be able to lock in
superior selling prices. On the other hand, however, extreme price volatility
may lead to heightened counterparty default risk, margin volatility and
reduced earnings visibility.
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Exhibit 9: CBOT soybean futures
Source: Bloomberg
Exhibit 10: CBOT corn futures
Source: Bloomberg
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Exhibit 11: NYBOT cotton futures
Source: Bloomberg
Exhibit 12: CBOT sugar futures
Source: Bloomberg
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Heightened price volatility calls for balance sheet strength. Strong
balance sheets and financial flexibility are crucial in an environment of
commodity price inflation and volatility, as this can potentially increaseworking capital requirements. Inadequate balance sheet strength was a
common driver behind industry consolidation in 2010 as poorly capitalized
companies found themselves unable to fund short term working capital
needs and were eventually acquired by their stronger peers.
As such, we favour large players who have ready access to capital, who
are nimble to capitalize on acquisition opportunities that may arise. In this
respect, large commodity traders such as Noble and Olam are likely to
have a competitive advantage from implied support from their strategic
investors China Investment Corporation (CIC) and Temasek Holdings,
respectively. In addition, both have proven to be successful in tapping capitalmarkets. We expect them to be at the forefront of industry consolidation.
Sustained commodity price inflation may benefit upstream
producers. An environment of stable, robust commodity prices favours
upstream producers such as plantations and miners, as these players
assume outright price exposure. Higher commodity prices elevate gross
profit margins, ceteris paribus. For this reason, mid-stream supply chain
managers have been encouraged to increase their presence in the upstream
value chain in a bid to capture lucrative margins and to secure supplies.
Should raw material supplies become constrained, we may see bidding
activity for upstream assets heat up in 2011.
Within our coverage universe, Straits Asia Resources (SAR) is directly
leveraged to thermal coal prices, while GAR and WIL are exposed to Crude
Palm Oil (CPO) prices. GAR, being one of the largest oil palm plantation
owners in the world, stands to benefit the most from higher CPO prices,
but rising prices could hurt margins for WIL's consumer pack business.
Exhibit 13: Thermal coal prices, 2009 - present
Source: Bloomberg
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Sector Update
Exhibit 14: Crude palm oil prices, 2009 - present
Source: Bloomberg
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Section E: Risk factors
Policy risk. Macroeconomic policies such as quantitative easing may createan environment of prolonged low interest rates and USD, spurring inflation.
As such, there may be increased risk of governments implementing price
controls or trade restrictions in a bid to reign in inflation. Other
macroeconomic policies that may hurt demand for commodities include
fiscal or monetary tightening measures.
Concentration risk from China. China has undoubtedly been a major
driving force behind commodity markets, with its huge domestic demand
spurring demand for raw materials and finished goods alike. The nation's
share of global commodity demand has increased rapidly over the past
decade, and its rapid growth - which the IMF projects to be at 10.5% in2010 and 9.6% in 2011 - implies that it will continue to dominate global
commodity markets. Moderating growth or policy controls from China could,
as such, have a widespread impact on global commodity markets; and
companies with significant exposure to China may be vulnerable to
concentration risk.
We are already seeing signs of cooling measures from China. Input prices
are increasing at a near record pace, prompting speculation over the
implementation of monetary tightening and potentially underwriting the case
for further tightening to bring inflation under control. For instance, China
has been reported to be deliberating price caps on agricultural productsand other essential food items. Such policies could hurt commodity and
food producers and supply chain managers alike, as profit margins and
volumes may come under pressure.
Acquisition indigestion. As the industry continues to consolidate, we
see potential pitfalls associated with acquisition risk. These include over-
aggressive acquisitions at the expense of balance sheet health, execution
risk in integrating newly acquired assets with existing portfolios, as well as
poorer-than-expected performance from acquisition targets. Unsuccessful
acquisitions or acquisitions valued at an unsubstantiated premium may
take a toll on future earnings.
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Sector Update
Section F: Recommendation
Commodities to benefit from economic recovery. We remain
OVERWEIGHT on commodities as the continued economic recovery in
2011 will boost demand for raw materials. Within the sector, our preference
lies with companies that have (i) strong balance sheets, (ii) well-diversified
business models and (iii) proven execution track records.
Exhibit 15: Business models of commodities firms under coverage
Source: OIR
Preferred picks: Noble and Olam. Among the realm of locally listed
commodities stocks, we highlight Noble and Olam as our preferred picks
for 2011. Noble's shares have lagged its closet peer Olam's YTDperformance, possibly weighed by its lackluster showing in 2Q10 owing in
part to poor Chinese soybean crushing margins. While policy risk from
China remains, Noble's well-diversified business model means that continued
growth from other segments will offset underperformance from any single
business unit. In addition, the group has laid the foundation for medium
term growth by expanding its pipeline capacity and these efforts should
come to fruition in 2011. Its strong balance sheet also positions it for
inorganic growth opportunities.
We also like Olam for its consistent track record and agility in capturing
opportunistic investments. Its existing businesses should continue to dowell on the back of robust demand and supply fundamentals for agricultural
commodities. Volume contribution from investments and acquisitions will
further boost the group's earnings in 2011.
Golden Agri-Resources Noble Olam Straits Asia Resources Wilmar
Description Oil Palm Plantation Owner Supply chain manager Supply chain manager Coal miner Supply chain manager
Product portfo lio - Crude Palm oil- Agriculture- Energy
- Metals, minerals and ores
- Agriculture - Thermal coal- Crude palm oil- Soybean crushing
- Consumer pack cooking oil
Key earnings driver Volume, CPO prices Volume Volume Coal price Volume, CPO prices
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Exhibit 16: Sector coverage
Source: OIR
Price Rating Fair FY11 FY11 Analyst
(10 Dec) Value PER Div
Yield
(S$) (S$) (x) (%)
Golden Agri-Resources 0.77 BUY 0.91 14.3 0.6% Carey Wong
Noble Group 2.12 BUY 2.59 13.9 1.8% Lee Wen Ching
Olam Int'l 3.10 BUY 3.53 21.2 1.2% Lee Wen Ching
Straits Asia Resources 2.45 BUY 3.13 10.0 6.0% Lee Wen Ching
Wilmar 5.95 HOLD 6.48 16.5 1.3% Carey Wong
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Section G: Company profiles
Golden Agri-Resources Ltd: Upgrade to BUY on raising CPO trend
Summary: Golden Agri-Resources (GAR) is likely to see further boost
from the continued run-up in CPO (crude palm oil) prices over the next six
months, underpinned by supply-side issues brought on by incremental
weather conditions in Indonesia. This is likely to affect CPO output for
Malaysia and Indonesia to a smaller extent, and we see the need to raise
our CPO price assumption yet again from US$900/ton to US$950/ton; this
as we expect prices to edge up even more in early 2011 before dropping off
after mid Jun 2011. But in line with the sharp spike in CPO prices, the
Indonesian government has also moved to raise the export tax on the
commodity from 15% in Nov to 20% in Dec. We are increasing our estimatesfor FY11 revenue and core earnings by 5.0% and 8.6% respectively. As we
are also raising our valuation from 16x to 17x FY11F EPS, our fair value
improves from S$0.78 to S$0.91. As there is now an upside of >10%, we
upgrade our rating to BUY.
Noble Group Ltd: Earnings to take flight in 2011
Summary: We reiterate our BUY rating on Noble Group (Noble) with S$2.59
fair value estimate in anticipation of earnings acceleration in FY11, as the
group begins to reap the fruits of its recent pipeline investments. To recap,
Noble's 3Q10 results exceeded expectations, reversing sharply from its
weak 2Q10, with revenue of US$14.9b (+78.7% YoY; +15.6% QoQ) and
core net profit of US$131.1m (flat YoY; +178% QoQ). Going forward, we
expect earnings to be buoyed by strong underlying fundamentals for
commodities such as energy and agriculture. Several of the group's pipeline
investments are nearing maturity and these should lend a further boost to
earnings from 4Q10. Management targets to achieve US$1b in earnings
over the next three years, implying a 24% CAGR between FY09 and FY13.With its robust balance sheet, the group is well-positioned to capture
investment opportunities that may arise.
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Olam International: Strategically positioned amid industry
consolidation
Summary: Olam International (Olam) kicked off its FY11 on a strong note
and remains poised for sustained medium-term growth, driven by robust
underlying fundamentals for agricultural commodities, coupled with volume
and margin growth on the back of the group's ongoing expansion initiatives.
The group recently delivered a 30.6% YoY growth in 1Q11 revenue to S$2.5b,
while net profit jumped 56.2% YoY to S$29.7m. Volumes grew 21.1% as it
gained market share amid industry consolidation, while improved margins
further boosted profits. Going forward, further margin expansion will be
supported by the provision of value-added services. In addition, we view
Olam's ready access to capital as a strategic advantage that will allow it to
extend its dominance amid industry consolidation. We maintain our BUYrating on Olam. Our fair value estimate remains at S$3.53
Straits Asia Resources: 2011 earnings to recover along with
thermal coal prices
Summary: Straits Asia Resources (SAR) has successfully navigatedthrough a challenging 2010 and we believe that the group is now ready to
leverage on an upturn in 2011. Thermal coal prices have been rising and
experts predict continued upward pressure amid tight demand and supply
fundamentals. China's restocking ahead of winter has been driving demand,
while Indonesian supplies remain constricted as wet weather has hampered
production, resulting in higher thermal coal prices. We expect margin
compression in FY10 to reverse in FY11. Our projections imply a 141%
surge in FY11 net profit, driven by (i) a recovery of thermal coal prices, (ii)
increased production volumes, and (iii) easing cost pressure. We maintain
our BUY rating and S$3.13 fair value estimate. Key risks include delays in
obtaining the Pinjam Pakai permits, higher than expected costs, prolongedwet weather and continued USD/SGD weakness.
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Sector Update
Wilmar: Near-term margin squeeze may continue
Summary: Wilmar International Limited (WIL), after posting a pretty muted
set of 3Q10 results recently, could continue to face margin squeeze in its
edible oil and oil seeds crushing business in the near to even medium term
due to the persistent rise in raw material prices. And because its consumer
products are typically deemed to be "essential food items", it could also
face difficulties in passing on the higher raw material prices to consumers
due to governmental price controls. As such, we see the need to revise
down our FY11F earnings by 8.0% to account for the risk of an extended
period of margin squeeze. Our fair value also drops from S$7.04 to S$6.48,
even as we keep our valuation unchanged at 18x FY11F EPS. Maintain
HOLD in view of its more positive long-term outlook.
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Sector Update
Upgrade to BUY on Raising CPO Trend
Golden Agri-Resources Ltd14 December 2010
Upgrade to
BUYPrevious Rating: HOLD
Closing price (10 Dec): S$0.77Fair Value : S$0.91
Reuters Code GAGR.SI
ISIN Code E5H
Bloomberg Code GGR SP
Issued Capital (m) 12,139
Mkt Cap (S$m / US$m) 9,407 / 7,193
Major ShareholdersThe Widjaja Family 48.5%
Free Float (%) 51.5%
Daily Vol 3-mth (000) 68,972
52 Wk Range 0.480 - 0.795
Carey Wong(65) 6531 9808e-mail: [email protected]
Further CPO price upside. Golden Agri-Resources (GAR)
is likely to see further boost from the continued run-up in CPO
(crude palm oil) prices over the next six months, underpinned
by supply-side issues brought on by incremental weather
conditions in Indonesia. During its recently-concluded 3Q10
results briefing, management revealed that it does not expect
any increase in production in 2010 (versus +5% previously),
attributing the shortfall to the heavy rainfall over the past fewmonths, which has already led to a 7% fall in FFB (fresh fruit
bunch) output YTD. Rain also hampered new plantings, which
only grew by 7.8k ha YTD versus an original target of 25k ha.
Still, GAR believes that the continued rise in CPO prices should
be more than able to make up for the production shortfall.
Revising our CPO base assumption yet again. And in view
of the current supply issues which are likely to affect CPO
output for Malaysia and Indonesia to a smaller extent, we see
the need to revise up our CPO price assumption yet again
from US$900/ton to US$950/ton; this as we expect to see
prices edging up even more in early 2011 before dropping offafter mid Jun 2011. As a recap, CPO prices have risen sharply
from an average of US$808/ton in 3Q10 to an average of around
US$979/ton in Oct and Nov 2010; hence we see further room
for earnings upside in the near term, given that CPO prices
are now hovering above US$1000/ton.
Also likely to see higher export taxes. But in line with the
sharp spike in CPO prices, the Indonesian government has
also moved to raise the export tax on the commodity, which
also works to indirectly cap the domestic selling price; and
according to recent media reports, the government is also
planning to revise the tax again in Dec despite just hiking itfrom 10% to 15%. As a recap, the export tax is on a progressive
scale and will rise with CPO prices; we understand that it will
hit a max of 25% should CPO prices rise above US$1250/ton.
Raising fair value to S$0.91. As a result of our latest revision,
we are increasing our estimates for FY11 revenue and core
earnings by 5.0% and 9.1% respectively. As we are also raising
our valuation from 16x to 17x FY11F EPS, our fair value
improves from S$0.78 to S$0.91. As there is now an upside of
>10%, we upgrade our rating to BUY.
1000
1500
2000
2500
3000
3500
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
0.1
0.4
0.7
1.0
GoldenAgri
STI
(US$ m) FY08 FY09 FY10F FY11F
Revenue 2985.9 2293.7 3299.8 3688.7
EBITDA 587.3 383.1 566.1 775.3
P/NTA (x) 1.6 1.4 1.3 1.2
EPS (cts) 13.9 5.3 3.0 4.1
PER (x) 15.7 33.8 20.0 14.3
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Sector Update
Golden Agri's Key Financial Data
EARNINGS FORECAST BALANCE SHEET
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F
Revenue 2,985.9 2,293.7 3,299.8 3,688.7 Cash 133.2 287.5 326.1 345.9
EBITDA 587.3 383.1 566.1 775.3 Other Current Assets 574.3 818.2 1036.7 1109.6
Depreciation & Amortisation -58.2 -68.3 -97.5 -111.3 Fixed Assets 971.0 1102.6 1358.4 1200.3
Bio-asset Revaluation 1,457.2 302.9 0.0 0.0 Total Assets 6825.5 7900.5 8478.6 8460.1
Operating Profit 1,986.3 617.7 468.6 664.0 Current Liabilities less Debt 238.4 410.3 493.0 474.6
Net Interest -35.4 -41.3 -51.2 -39.9 Debt 553.9 683.1 825.0 670.0
Associates 5.4 6.8 4.0 8.0 Other Long Term Llabilities 1326.3 1273.4 1320.0 1020.0
Exceptionals 20.1 -1.4 -6.1 0.0 Total Liabilities 2118.7 2366.7 2638.0 2164.6
Pre-tax Profit 1,947.1 593.1 465.3 662.0 Shareholders Equity 4613.7 5437.7 5737.1 6184.5
Net Profit 1,382.5 607.0 360.1 502.3 Total Equity and Liabilities 6825.5 7900.5 8478.6 8460.1
CASH FLOW
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F KEY RATES & RATIOS FY08 FY09 FY10F FY11F
Operating Profit 550.0 422.8 567.3 816.6 EPS (US cents) 13.9 5.3 3.0 4.1
Working Capital Changes 67.9 -36.1 -154.8 33.0 Core EPS (US cents) 3.8 1.8 3.0 4.1
Net cash from Operations 427.4 256.7 305.2 373.0 Core PER (x) 15.7 33.8 20.0 14.3
Capex -244.1 -256.2 -400.0 -250.0 Price/NTA (x) 1.6 1.4 1.3 1.2
Investing Cash Flow -341.0 -388.4 -356.8 -128.5 EV/EBITDA (x) 13.0 19.8 13.6 9.7
Change in Equity 0.0 216.5 0.0 0.0 Dividend yield (%) 1.0 0.6 0.6 0.6Net Change in Debt 16.7 78.1 141.9 -155.0 ROIC (%) 26.8 9.9 5.5 7.3
Financing Cash Flow -77.6 283.0 90.2 -224.6 ROE (%) 30.0 11.2 6.3 8.1
Net Cash Flow 8.7 154.3 38.5 19.8 Net gearing (%) 9.1 7.3 8.7 5.2
Ending Cash Balance 133.2 287.5 326.1 345.9 PE to growth (x) 0.3 -0.2 -0.5 0.4
Source: Company data, OIR estimates
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Sector Update
Earnings to take flight in 2011
Strong 3Q10; earnings to accelerate in FY11. Noble Group(Noble) recently reported a strong set of 3Q10 results. Weare positive on the stock in anticipation of earnings accelerationin FY11, as the group begins to reap the fruits of its recentpipeline investments. As a recap, Noble beat expectations bydelivering a 78.7% YoY jump in 3Q10 revenue to US$14.9band a 40.6% YoY increase in gross profit to US$442.3m.Recurring net profit was flat YoY at US$131.1m. Sequentially,these represented a 15.6% improvement in revenue, and moresignificantly, a 178% jump in recurring net profit, demonstratingits sharp reversal from a lacklustre 2Q10. We expect Noble'searnings to continue to be buoyed by strong underlyingfundamentals for commodities such as energy and agriculture.The group has spent US$2.8b expanding its pipeline since2007 and several of these investments are nearing maturity,adding a further boost to earnings from 4Q10 onwards.
Performance buoyed by Agriculture and Energy. Noble'srobust 3Q10 performance was driven by its Agriculture andEnergy segments, which benefitted from stronger volumes andhigher prices amid stabilising economic conditions. Overall
gross profit margin contracted by 0.8ppt YoY (but expanded0.6ppt QoQ) due to higher revenue contribution from the Energysegment which entails lower margins. Core net profit margineased 0.7ppt (but gained 0.5ppt QoQ) to 0.9%. Agriculture,whose 2Q10 margins were hurt by challenging soybeanmarkets, surprised pleasantly with a record high gross profitof US$237.5m in 3Q10 as gross profit margin rebounded by2.3ppt YoY and 4.0ppt QoQ to 6.7%. Management expressedconfidence in this segment's FY11 performance as it has lockedin improved soy crushing margins.
Preferred pick within commodities sector. Noble hasreaffirmed its target of achieving US$1b in earnings over the
next three years, implying a 24% CAGR between FY09 andFY13. With its strong balance sheet, the group remains well-positioned to capture any investment opportunities that mayarise. While China's price controls may imply volatileagricultural margins in the near term, Noble's well-diversifiedbusiness model means that continued growth from othersegments and geographies will offset underperformance fromany single business unit. With earnings expected to bepropelled by pipeline investments coming on stream in 2011,Noble is among our preferred picks within the commoditiessector. We reiterate our BUY rating with S$2.59 fair valueestimate. Key risks that may impede the group's performanceinclude longer-than-expected gestation periods for its
investments, as well as continued USD/SGD weakness, whichcould lead to translation losses.
Noble Group14 December 2010
Maintain
BUYPrevious Rating: BUYClosing price (10 Dec): S$2.12Fair Value : S$2.59
Reuters Code NOBG.SI
ISIN Code N21
Bloomberg Code NOBL SP
Issued Capital (m) 6,027
Mkt Cap (S$m/US$m) 12,776 / 9,768
Major Shareholders
Fleet Overseas (NZ) 23.5%
Free Float (%) 48.6%
Daily Vol 3-mth (000) 28,011
52 Wk Range 1.540 - 2.232
Lee Wen Ching(65) 6531 9806e-mail: [email protected]
1000
1500
2000
2500
3000
3500
4000
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
0.2
0.7
1.2
1.7
2.2
2.7
3.2
3.7
Noble
STI
(US$ m) FY08 FY09 FY10F FY11F
Revenue 36,090.2 31,183.1 50,282.0 60,798.8
Gross Prof it 1 ,347.6 1,105.0 1,357.6 1,702.4
P/NAV (x) 2.8 2.1 2.9 2.5
EPS (cts) 17.5 14.5 8.6 11.7
PER (x) 12.0 14.6 21.6 13.9
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Sector Update
Noble Group's Key Financial Data
EARNINGS FORECAST BALANCE SHEET
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F As at 31 Dec (US$m) FY08 FY09 FY10F FY11F
Revenue 36,090.2 31,183.1 50,282.0 60,798.8 Cash and cash equivalents 1,318.2 937.3 2,700.7 2,451.2
Gross Profit 1,347.6 1,105.0 1,357.6 1,702.4 Inventories 1,757.0 3,414.6 3,519.7 3,951.9
Other income 103.9 125.5 70.4 60.8 Property, plant, equipment 1,003.8 1,522.7 2,016.5 2,295.7
Operating expenses -567.6 -422.9 -597.4 -715.0 Total assets 8,152.6 10,655.0 13,831.5 15,211.4
EBIT 883.9 807.6 830.7 1,048.2 Debt 2,556.1 3,541.1 5,833.7 5,833.7
Associates & JV -15.8 -24.8 -6.8 -6.8 Current liabilities excluding debt 3,600.4 3,937.0 4,596.2 5,435.8
PBT 676.0 620.2 584.0 793.1 Total liabilities 6,291.8 7,616.8 10,480.2 11,330.4
PAT 579.7 555.1 519.7 705.9 Shareholders equity 1,851.1 2,955.4 3,344.3 3,872.6
Reported net profit 577.3 556.0 518.5 704.4 Total equity 1,860.9 3,038.2 3,351.2 3,881.1Recurring net profit 437.8 429.7 453.7 704.4 Total equity and liabilities 8,152.6 10,655.0 13,831.5 15,211.4
CASH FLOW
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F KEY RATES & RATIOS FY08 FY09 FY10F FY11F
Op profit before working cap. 958.1 877.5 940.6 1,174.0 EPS (US cents) 17.5 14.5 8.6 11.7
Working cap, taxes and interest 512.3 -1,687.1 -828.0 -847.5 NAV per share (US cents) 57.6 79.0 55.7 64.5
Net cash from operations 1,470.4 -809.6 112.5 326.5 PBT margin (%) 1.9% 2.0% 1.2% 1.3%
Purchase of PP&E -506.2 -626.9 -600.0 -400.0 Net profit margin (%) 1.6% 1.8% 1.0% 1.2%
Investing cash flow -584.4 -1,136.9 -512.1 -400.0 PER (x) 12.0 14.6 21.6 13.9
Financing cash flow -176.9 1,399.0 2,163.0 -176.1 Price/NAV (x) 2.8 2.1 2.9 2.5
Net cash flow 709.1 -547.5 1,763.4 -249.5 EV/EBITDA (x) 11.4 13.0 13.6 11.2
Cash at beginning of year 471.1 1,175.8 619.8 2,383.2 Dividend yield (%) 2.7% 2.2% 1.3% 1.8%
Cash at end of year 1,175.8 619.8 2,383.2 2,133.6 ROE (%) 31.2% 18.8% 15.5% 18.2%
Cash and cash equivalents 1,318.2 937.3 2,700.7 2,451.2 Net gearing (%) 66.9 88.1 93.7 87.3
Source: Company data, OIR estimates
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Sector Update
Good start to FY11; growth strategy intact . Olam
International (Olam) kicked off its FY11 on a strong note and
remains poised for sustained medium-term growth, driven by
robust underlying fundamentals for agricultural commodities,
coupled with volume and margin growth on the back of the
group's ongoing expansion initiatives. To recap, Olam posted
its 1Q11 results with a 30.6% YoY growth in revenue to S$2.5b.
Net profit jumped 56.2% YoY to S$29.7m. We are projecting
earnings CAGR of 17% over the next two years and believethat profits may surpass expectations should the group embark
on more M&A activity with near-term earnings accretion.
Beyond structural bottlenecks which are expected to keep
physical markets tight in the near term, we expect Olam to
grow its earnings in the medium term through market share
gains and margin expansion.
Volume growth, improved profitability to drive
performance. Olam's 1Q11 growth was supported by broad-
based revenue and volume growth across all segments. Overall
volume grew 21.1% as the group gained market share amid
industry consolidation. Margin expansion further boosted the
group's bottomline with Gross Contribution (GC) / ton and NetContribution (NC) / ton growing 14.4% and 16.0% YoY,
respectively, demonstrating the group's success in extracting
greater value along the supply chain. Management sees room
for margin expansion via the provision of value-added services.
As the industry continues to consolidate in 2011, we see room
for Olam to further expand its market share.
Financial flexibility offers strategic advantage. As the
industry continues to consolidate in 2011, companies that are
nimble to capitalize on opportunistic investments will have a
strategic advantage over their peers. As such, we believe that
Olam, with its ready access to capital, will extend itsdominance against this landscape. The group's balance sheet
remains sound with adjusted net gearing of 0.59x. Credit
facilities remain available to the group, which recently
completed a US$250m bond issue and US$350m loan facility
and is backed by Temasek Holdings as a strategic shareholder.
Olam has embarked on several investments, with the most
recent being the setting up of a sugar refinery in Nigeria and
the construction of a fertilizer complex and development of
palm plantations in Gabon. Such investments should build a
larger volume and revenue base to support its sustained long-
term growth. We maintain our BUY rating on Olam. Our fair
value estimate remains at S$3.53.
Strategically positioned amid industry consolidation
Olam International Ltd14 December 2010
Maintain
BUYPrevious Rating: BUYClosing price (10 Dec): S$3.10Fair Value : S$3.53
Reuters Code OLAM.SI
ISIN Code O32
Bloomberg Code OLAM SP
Issued Capital (m) 2,125
Mkt Cap (S$m/US$m) 6,716 / 5,135
Major Shareholders
Kewalram Singapore Ltd 21.9%
Free Float (%) 40.6%
Daily Vol 3-mth (000) 7,555
52 Wk Range 2.180 - 3.410
Lee Wen Ching(65) 6531 9806e-mail: [email protected]
1000
1500
2000
2500
3000
3500
4000
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Olam Int'l
STI
(S$ m) FY09 FY10 FY11F FY12F
Revenue 8,587.9 10,455.0 11,499.6 12,653.1
Gross Profit 1,746.4 2,230.4 2,391.9 2,631.8P/NAV (x) 5.1 3.5 3.3 2.9
EPS (cts) 10.6 13.5 14.6 17.4
PER (x) 29.2 23.0 21.2 17.8
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Sector Update
Exhibit 17: Segmental volumes, 1Q07 - present
-
200,000
400,000
600,000
800,000
1,000,0001,200,000
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
metricton
E dible N uts, Spices & B eans C onfectionery & Bev erage Ingredients
Food staples & Packaged Foods Industrial Raw M aterials
Source: Company, OIR
Exhibit 18: NC/ton by segment, 1Q07 - present
-
50
100
150
200
250
300
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
NC/ton(S$)
Edible N uts , Spic es & Beans C onfec tionery & Bev erage IngredientsF ood s taples & Pac kaged F oods Indus trial Raw M aterials
Source: Company, OIR
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Sector Update
Olam's Key Financial Data
EARNINGS FORECAST BALANCE SHEET
Year Ended 30 Jun (S$m) FY09 FY10 FY11F FY12F As at 30 Jun (S$m) FY09 FY10 FY11F FY12F
Sale of goods 8,587.9 10,455.0 11,499.6 12,653.1 Cash and cash equivalents 533.8 671.5 600.0 466.6
Other income 138.5 241.2 0.0 0.0 Inventories 1,966.4 2,537.9 2,759.9 3,036.7
Gross profit 1,746.4 2,230.4 2,391.9 2,631.8 Property, plant, equipment 517.4 1,054.2 1,061.3 1,067.7
Operating expenses -1,290.3 -1,595.6 -1,766.3 -1,938.9 Total assets 5,415.4 7,799.5 7,997.0 8,330.1
EBIT 456.1 634.7 625.6 693.0 Debt 3,174.2 4,503.0 4,478.1 4,455.7
Finance costs -239.2 -227.5 -268.7 -267.3 Current liabilities excluding debt 1,132.5 1,396.0 1,385.6 1,463.4
PBT 258.0 420.2 356.9 425.6 Total liabilities 4,369.5 6,028.8 5,993.5 6,048.8
PAT 252.0 359.7 310.5 370.3 Shareholders equity 1,045.8 1,771.9 2,004.7 2,282.5
Reported net profit 252.0 359.5 310.5 370.3 Total equity 1,045.9 1,770.7 2,003.6 2,281.3
Recurring net profit 182.2 271.8 310.5 370.3 Total equity and liabilities 5,415.4 7,799.5 7,997.0 8,330.1
CASH FLOW
Year Ended 30 Jun (S$m) FY09 FY10 FY11F FY12F KEY RATES & RATIOS FY09 FY10 FY11F FY12F
Op profit before working cap. 331.0 531.3 678.5 746.5 EPS (S cents) 10.6 13.5 14.6 17.4
Working cap, taxes and interest 96.6 -1,588.2 -587.5 -704.9 NAV per share (S cents) 61.0 87.6 94.4 107.4
Net cash from operations 427.6 -1,056.9 91.0 41.6 PBT margin (%) 3.0 4.0 3.1 3.4
Purchase of PP&E -208.1 -65.4 -60.0 -60.0 Net profit margin (%) 2.9 3.4 2.7 2.9
Investing cash flow -544.1 -750.2 -60.0 -60.0 PER (x) 29.2 23.0 21.2 17.8
Financing cash flow 198.8 1,984.2 -102.5 -115.0 Price/NAV (x) 5.1 3.5 3.3 2.9
Net cash flow (Incl forex) 104.4 235.3 -71.6 -133.4 EV/EBITDA (x) 17.9 14.4 14.9 13.7
Cash at beginning of year 164.3 268.7 503.9 432.4 Dividend yield (%) 1.1 1.5 1.2 1.4
Cash at end of year 268.7 503.9 432.4 299.0 ROE (%) 24.1 20.3 15.5 16.2
Cash and cash equivalents 533.8 671.5 600.0 466.6 Net gearing (%) 252.5 216.2 193.4 174.8
Source: Company data, OIR estimates
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Sector Update
Straits Asia Resources' Key Financial Data
EARNINGS FORECAST BALANCE SHEET
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F As at 31 Dec (US$m) FY08 FY09 FY10F FY11F
Revenue 585.2 748.4 728.5 953.6 Cash and cash equivalents 170.6 31.8 104.4 91.3
Cost of sales -357.7 -448.0 -550.2 -588.3 Other current assets 72.3 164.5 155.4 200.5
Gross profit 227.5 300.3 178.3 365.3 Property, plant, equipment 110.1 121.8 198.6 231.3
Other income 6.3 -1.0 3.7 3.7 Total assets 874.0 986.5 1,127.6 1,192.4
Operating expenses -37.8 -57.5 -40.1 -52.5 Debt 287.5 206.5 286.5 285.9
EBIT 196.0 241.8 142.0 316.6 Current liabilities excluding debt 141.2 155.7 166.1 182.8
Finance cost -14.8 -22.9 -11.5 -11.4 Total liabilities 498.2 514.4 621.6 604.6
PBT 181.2 218.9 130.5 305.2 Shareholders equity 375.7 472.1 506.1 587.8
Income tax -56.8 -85.4 -45.7 -100.7 Total equity 375.7 472.1 506.1 587.8
Net profit 124.4 133.5 84.8 204.5 Total equity and liabilities 874.0 986.5 1,127.6 1,192.4
CASH FLOW
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F KEY RATES & RATIOS FY08 FY09 FY10F FY11F
Op profit before working cap. 180.1 131.1 147.1 234.1 EPS (US cents) 11.4 12.0 7.5 18.1
Working cap, taxes and interest 11.4 49.7 11.5 -23.9 NAV per share (US cents) 34.4 41.8 44.8 52.1
Net cash from operations 191.5 180.7 158.6 210.2 PBT margin (%) 31.0% 29.3% 17.9% 32.0%
Purchase of PP&E -72.6 -82.3 -140.0 -100.0 Net profit margin (%) 21.3% 17.8% 11.6% 21.4%
Investing cash flow -65.1 -154.4 -140.0 -100.0 PER (x) 16.0 15.1 24.1 10.0
Financing cash flow 15.0 -165.1 54.1 -123.3 Price/NAV (x) 5.3 4.3 4.0 3.5
Net cash flow 141.4 -138.8 72.6 -13.1 Dividend yield (%) 3.8 3.9 2.5 6.0Cash at beginning of year 29.1 170.6 31.8 104.4 ROE (%) 33.1% 28.3% 16.8% 34.8%
Cash at end of year 170.6 31.8 104.4 91.3 Net gearing (%) 31.1% 37.0% 36.0% 33.1%
Cash and cash equivalents 170.6 31.8 104.4 91.3 Interest cover (x) 13.3 10.5 12.4 27.7
Source: Company data, OIR estimates
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Sector Update
Wilmar Intl Ltd14 December 2010
Downgrade to
HOLDPrevious Rating: BUYClosing price (10 Dec): S$5.95Fair Value : S$6.48
Reuters Code WLIL.SII
ISIN Code F34
Bloomberg Code WIL SP
Issued Capital (m) 6,394
Mkt Cap (S$m/US$m) 41,558 / 29,965
Major Shareholders
Wilmar Intl 40.6%
Free Float (%) 24.7%
Daily Vol 3-mth (000) 10,926
52 Wk Range 5.250 - 7.290
Carey Wong(65) 6531 9808e-mail: [email protected]
Near-term margin squeeze may continue
Margin squeeze may continue. Wilmar International Limited(WIL), after posting a pretty muted set of 3Q10 results recently,could continue to face margin squeeze in its edible oil and oilseeds crushing business in the near to even medium termdue to the persistent rise in raw material prices. As a recap,although its 3Q10 revenue jumped 23.3% YoY (+14.9% QoQ),its gross profit tumbled 40.6% YoY (-39.8% QoQ), with thecompany attributing the slide in margins to "a tough operatingenvironment" for its Oilseeds and Grains business (coupled
with "untimely" purchases of raw materials) as well as lowermargins for Palm and Laurics and Consumer Products.
China looking to cap food inflation. And because itsconsumer products are typically deemed to be "essential fooditems", it could also face difficulties in passing on the higherraw material prices to consumers. We note that this usuallycomes in the form of official price caps imposed bygovernments as a means to control inflation.
Already in China, where WIL is one of the largest soybeancrushers and edible oil consumer pack sellers, the Kunminggovernment has reportedly imposed price controls and asked
food producers to apply for official approval before making anyprice changes1 ; this after the PRC's consumer price index jumped 4.4% in Oct and 5.1% in Nov, with food prices up10.1% and 11.7% respectively. And with the Chinese NewYear festivities coming up in early Feb, there could be a goodchance that these controls could persist for a good while.Consumer products made up 16% of WIL's FY09 revenue,and probably less than 10% of net profit.
Diversification to bring long-term growth. Diversificationseems to be the theme to drive long-term growth. We notethat WIL has recently inked a deal to sell a 20% stake in itsflour milling operations in China to FFM Berhad (price is still
being worked out) while simultaneously buy a 20% stake inthe Malaysian flour miller for RMB378.1m (US$120m). WIL isalso expanding into the sugar business via the A$1.8bacquisition of Sucrogen and growing of its own sugarplantations in Indonesia.
Maintain HOLD with revised S$6.48 fair value. Still, wesee the need to revise down our FY11F earnings by 8.0% toaccount for the risk of an extended period of margin squeeze.As such, our fair value drops from S$7.04 to S$6.48, even aswe keep our valuation unchanged at 18x FY11F EPS. MaintainHOLD in view of its more positive long-term outlook.
1http://www.bloomberg.com/news/2010-12-04/wal-mart-among-companies-
facing-china-price-controls-update1-.html
1000
1500
2000
2500
3000
3500
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Aug-10
Nov-10
1.02.0
3.0
4.0
5.0
6.0
7.0
8.0
Wilmar
STI
IUS$ m) FY08 FY09 FY10F FY11F
Revenue 29145.2 23885.1 27220.4 30969.2
EBITDA 1862.6 2057.0 1725.1 2041.2EPS (cts) 24.0 29.5 22.9 27.7
PER (x) 19.1 15.5 20.0 16.5
Price/NTA (x) 5.2 4.2 3.6 3.1
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Page 32 14 December 2010
Sector Update
Wilmar's Key Financial Data
EARNINGS FORECAST BALANCE SHEET
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F As of 31 Dec (US$m) FY08 FY09 FY10F FY11F
Revenue 29,145.2 23,885.1 27,220.4 30,969.2 Cash 2,893.1 5,134.9 4,638.4 5,248.3
EBITDA 1,862.6 2,057.0 1,725.1 2,041.2 Other Current Assets 5,400.2 7,735.7 7,794.6 8,464.5
Depreciation & amortisation -207.9 -252.3 -364.0 -368.9 Fixed Assets 3,252.2 3,919.3 4,755.3 4,386.4
Operating Profit 1,654.7 1,821.7 1,361.0 1,672.3 Other long term assets 6,323.4 6,658.9 6,658.9 6,658.9
Net interest -254.0 -43.4 -28.2 5.3 Total Assets 17,868.9 23,448.8 23,847.1 24,758.0
Associates 111.2 46.2 150.0 200.0 Current Liabilities less Debt 2,245.7 1,994.8 2,198.1 2,348.1
Exceptionals 0.0 0.0 0.0 0.0 Debt 5,283.6 9,579.7 8,682.0 7,871.1
Pre-tax profit 1,789.3 2,294.4 1,782.8 2 ,177.6 Other Long Term Liabilities 364.3 462.6 354.1 454.2
Tax -232.2 -324.1 -249.6 -326.6 Shareholders Equity 9,606.5 10,931.1 12,063.7 13,452.5
Net Profit 1,531.0 1,882.0 1,464.5 1,768.0 Total Equity and Liabilities 17,868.9 23,448.8 23,847.1 24,758.0
CASH FLOW
Year Ended 31 Dec (US$m) FY08 FY09 FY10F FY11F KEY RATES & RATIOS FY08 FY09 FY10F FY11F
Profit Before Tax 2,088.7 2,136.7 2,175.1 2,541.2 EPS (US cents) 24.0 29.5 22.9 27.7
Working Capital Changes 1,629.9 -2,404.1 210.1 -519.9 Fully Diluted EPS (US cents) 23.4 28.7 22.4 27.0
Net Cash from Operations 3,230.9 -520.4 2,465.6 1,926.4 PER (x) 19.1 15.5 20.0 16.5
Capex -1,012.2 -973.9 -1,200.0 -1,000.0 Price/NTA (x) 5.2 4.2 3.6 3.1
Investing Cash flow -1,296.0 -1,282.4 -1,262.1 -856.3 EV/EBITDA (x) 17.0 16.4 19.3 15.6
Change in Equity 0.0 273.6 0.0 0.0 Dividend Yield (%) 1.3 1.3 1.1 1.3
Net Debt Change 245.8 4,024.7 -897.7 -810.9 ROIC (%) 10.3 9.2 7.1 8.3
Financing Cash Flow -1,345.9 1,161.2 -1,255.3 -1,142.9 ROE (%) 15.9 17.2 12.1 13.1
Net Cash flow 588.9 -641.6 -51.7 -72.9 Net Gearing (%) 24.9 40.7 33.5 19.5
Ending Cash Balance 2,893.1 5,134.9 4,638.4 5,248.3 PE to Growth (x) 0.2 0.7 -0.9 0.8
Source: Company data, OIR estimates
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Sector Update
For OCBC Investment Research Pte Ltd
Carmen Lee
SHAREHOLDING DECLARATION:The analyst/analysts who wrote this report holds NIL shares in the above security.
RATINGS AND RECOMMENDATIONS:OCBC Investment Researchs (OIR) technical comments and recommendations are short-term and tradingoriented.- However, OIRsfundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-monthinvestment horizon. OIRs Buy = More than 10% upside from the current price; Hold = Trade within +/-10%from the current price; Sell = More than 10% downside from the current price.- For companies with less than S$150m market capitalization, OIRs Buy = More than 30% upside from thecurrent price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from thecurrent price.
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