Wilmar International | Sell (Downgrade)

July 20 close: S$3.16

Target price: S$3.05

WILMAR International Limited now expects to report a net loss of around US$230 million in Q2 2016 due to " challenging operating conditions" particularly in oilseeds and grains manufacturing and its sugar business segment.

However, Wilmar still expects to be profitable for H1 2016, albeit earnings will be " significantly lower" from a year ago.

Adjusting for the expected Q2 loss, we pare our FY 2016 earnings estimate by 25 per cent and FY 2017 by 5 per cent this in turn reduces our fair value from S$3.34 to S$3.05.

We also downgrade our call from " hold" to " sell" and would probably re-engage closer to S$2.85.

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Wilmar International | Buy

July 20 close: S$3.16

Target price: S$4.14

Citi Research, July 19

WHILE this is a one-time quarterly loss, confidence on the firm' s plans to grow while reducing earnings volatility will be hit. In the short term, valuations will revert back to 0.9 time price to book, similar to levels before its plans to " consumerise" and reduce earnings volatility were priced in.

This negative development means Wilmar has to accelerate plans to bring stability to its business, given recent developments in Vietnam and India.

The three key factors that lead investors to like the stock include 1) a diversified/integrated model helps it avoid large swings 2) good progress at its consumer unit with volume growth of 13 per cent year on year last quarter and earnings at this unit making up about 25 per cent of group pre-tax earnings and 3) capital expenditure continues to reduce, falling 38 per cent year on year to US$165 million.