Wilmar International Limited - Positive datapoints underline our bullish view

It's not just the weather!: The ENSO Index remains in negative territory, hitting -10 in May-2009, pointing towards an increasing likelihood of an El Nino which the Australian Weather Bureau put at over 50%. While weather risk premium provides upside catalyst for CPO price, we reiterate that our positive view on CPO is not solely underlined by the weather alone.

Bullish signal from USDA report: The USDA report released yesterday was positive for soybean. Soybean plantings rose less than market expectations with acreage estimate of 77.48 million acres. The increase, though larger than reported in March, is not sufficiently large to obviate ongoing concerns over inventory stress, as highlighted by J.P. Morgan Global Soft Commodity Strategy team. The positive signal for soybean price is also expected to be supportive for CPO price.

Upcoming monthly CPO inventory data: The June monthly CPO inventory data for Malaysia is expected to be released on 10 July 2009 and is likely to show continued rise from 1.36 million MT in May-2009 to 1.6 million MT by Sep-2009 on the back of higher production season and gradual reversal of tree stress cycle. We have pointed out in our Plantations sector note on 22 June 2009 that this rise is largely priced–in given the over 20% fall in CPO price since May, and further reiterated the limited downside risks to CPO price on firmer crude oil price, tight soybean supply and rising weather risk premium (Plantations sector Alert on 29 June 2009).

Positive implications on Wilmar: These fundamentally positive datapoints continue to be strong catalysts for Wilmar. We have pointed out in our initiation note - Wilmar International Limited: Extended growing season on 22 June 2009 that a 10% increase in our CPO forecast would increase our net profit estimate for Wilmar by about 5.4%, as prices for refined products rise in tandem, and a high degree of cost pass-through could be achieved by the company. Separately, a steady uptrend in soybean price should also be slightly positive for Wilmar, as we note that the company does take its own view on commodity prices, although it hedges its soybean feedstock prices. The time interval between the import of soybean and the eventual sale of soybean meals/oil could boost margins for its oilseeds and grains business as prices move up. Evidently, oilseeds & grains PBT/MT improved to US$71.02 in 1Q08 in line with higher soybean and soybean products prices along with improvements in crushing margins. We reiterate our OW on Wilmar.

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