Wilmar - Outgrowing its roots

Wilmar is the world’s largest crude-palm-oil refiner, with a 23% market share, and rising. It has delivered wider profit margin than its peers, through strong pricing power, good market insights and economies of scale. We expect 12- 16% YoY profit growth in its refining business from 2010, backed by increasing global demand for edible oils. The company sells its palm oil in bulk and uses its own plantations, which fulfil 8% of its refining-feedstock need, as an effective bargaining chip to lower overall cost.

Wilmar is the largest provider of branded cooking oil in China (44% market share) and benefits from a strong distribution network and production flexibility that stems from having its own crushing business. Market-sharegain will continue as the company has excess crushing capacity in a market where capacity addition is banned and demand is improving. In the longer term, the soybean business will grow with rising consumption of cooking oils in China and meat globally.

Wilmar can leverage its extensive cooking-oil distribution network, which spans 2,560 cities in China, to expand its consumer-product offerings. These currently include cooking oils, flour, rice and bottled water. It can raise funds through the proposed Hong Kong listing of its Chinese assets to realise this growth path. While our base case assumes 7% core EPS growth in 2009 and 20% in 2010, new successful products will trigger additional growth.

Our S$6.00 sum-of-parts-based target price implies 15% upside. The stock has rallied recently but remains attractive versus its merchandising & processing and consumer peers at 13.7x 10CL PE given the company’s dominant market position in almost all of its businesses and strong management team. An increase in free float from shareholder restructuring can result in a higher MSCI weighting and drive a stock rerating.

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