Earnings revision. We raise our earnings forecasts for 2009-11 by an average of 33% to factor in higher sales volume and better margins for its soybean crushing and consumer pack in China.
Higher profit margin sustainable. Wilmar enjoys a higher and sustainable profit margin than its competitor due to its proximity to retailers and customers (transportation cost savings) and control on logistics to minimise leakages to a third party as well as business integration to maximise profit from its extensive marketing network. All these factors are likely to lead to at least US$40/tonne of cost savings for its downstream processing business.
Value creation from downstream listing. Unlocking value from the listing of its China operation in Hong Kong could potentially reap a special dividend of S$0.24/ share, assuming a 40% payout from the proceeds of the initial public offering (IPO). A listing in Hong Kong will pave the way for a China listing, which would further open up the domestic market for Wilmar, being a locally incorporated company.
Maintain BUY with a target price of S$6.50. Our new 12-month target price of S$6.50 is based on 15x 2010 PE and in line with Malaysia’s big-cap plantation stocks.
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