China business outlook: The potential listing of Wilmar’s China business would help fund further growth in China. We estimate the IPO could add 8-53 cents to Wilmar’s share price (we assume 24 cents in ourSOTP valuation, from the potential listing of 30% of the China business at 18x FY10E P/E). Management targets potential synergistic M&As. We estimate the stock deserves a premium to its plantation/supply chain peers which are trading at c.12x FY10E P/E.
Consumption growth in emerging markets: Wilmar’s presence in China makes it more than a pure plantation stock. Its high-volume oilseeds and grains business caters to rising soybean meal demand in China. We estimate soybean meal consumption in China to rise by 6% Y/Y next year. Wilmar’s consumer pack oils remain leading brands in China, Indonesia, and India. We believe this business is comparable to branded China consumer names trading at c.18x FY10E P/E.
Favorable CPO price outlook: Increasing signs of an El Nino return put CPO production at risk. The stock-usage ratio is expected to reach 13.7% by Sep-09—the lowest since Sep-03. Furthermore, tight soybean supply from crop losses in South America provides price support.
Valuation, PT and risks: Our Jun-10 PT is based on sum-of-the-parts. We value Wilmar’s core business on a two-stage DCF (WACC of 7.5% and growth rate of 2.5%), and add 24 cents from the potential Chinese business listing. Our PT equates to 14.7x FY10E P/E. A key downside risk to our PT is a higher-than-expected output depressing CPO prices, while we see an upside risk from a possible higher valuation multiple than the 18x FY10E P/E which we have assigned to the China business.
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