Wilmar, which has been dubbed by analysts as the “China proxy”, currently trades at 18 times its 2010 earnings, richer than rival China Agri Industries’ 14 times but cheaper than 22 times at China Foods.

Wilmar’s shares have gained more than 8 per cent this year, outperforming a 2.5 per cent rise on Singapore’s benchmark index, while other plantation firms such as Malaysia’s Sime Darby, IOI Group and Indonesia’s Astra Agro Lestari are trading lower.

Margins in Wilmar’s main business sectors — oilseeds and grains, palm and laurics and consumer food products — certainly have room to grow as the world’s most populous country and third-largest economy keeps to its target of 8 per cent annual growth.

YUAN BOOST?

An immediate margin boost may come from a yuan policy shift that could make imported soybeans cheaper for Wilmar — a top importer that dominates a fifth of China’s 94 million tonnes of soy processing capacity.

It also buffers Wilmar from negative margins arising from weak livestock feed demand for soymeal, as the food processor can channel soyoil into its cooking oil business that controls 45 per cent of China’s market.

In contrast, the influx of cheap soy imports may further weigh on smaller crushers that have tiny integrated downstream operations. Some have none to speak of.

Soyoil accounts for a quarter of China’s 6.4 million tonnes of edible oil imports, and Wilmar makes up the rest with palm oil from its estates in Southeast Asia, taking a larger market share than Sime and IOI.

Analysts say a Wilmar IPO will bring all these factors into play.

“Wilmar is one of its kind. They are not only selling to China but they also know the supply side (because) they have estates in Malaysian and Indonesia,” said Ivy Ng, an analyst with Malaysia’s CIMB Investment Bank.

“If you look at China Agri, they don’t have any estates, they buy palm, process and sell.”

Wilmar’s plantation landbank of 570,000 hectares is just 41 per cent planted, and analysts say the planting will rise in tandem with China’s growing appetite for edible oils and palm oil getting cheaper if Beijing lets its currency appreciate.

The scale of its operations — 130 processors and plants in China — allows Wilmar to manage the fluctuations in soybeans and palm oil and preserve earnings.

A 10 per cent change in the price of palm oil only affects the company’s 2010 earnings by 2 per cent, Goldman Sachs said in a note. Other analysts say such a swing affects earnings of purer plantation plays such as Astra Agro Lestari by 13 per cent.

TURNING TO RICE AND WHEAT

The major risk to Wilmar’s growth is that it will eventually come up against regulations stipulating that foreign firms cannot own new soy processors and those with a soy market share of more than 15 per cent will not get approval to expand capacity.

But analysts are still pricing in an upside to Wilmar’s share price, which surged 130 per cent in 2009. The Thomson Reuters I/B/E/S survey of 19 analysts has an average target price for Wilmar of S$7.80 (RM18.13) — a 13 per cent gain from its current level.

Much of the optimism lies with Wilmar’s aggressive move into China’s highly fragmented rice and wheat milling sectors, which are the world’s largest, and also produce noodles and pastries.

“They have been investing a lot in rice and flour in China, which can become very big,” Nomura analyst Tanuj Shori said.

“The biggest entry barrier is scale. The bigger you are, the easier it is to achieve higher profitability.”

China Agri leads with a 2 per cent market share in both sectors, but Wilmar can take top position as it can build mills at its existing manufacturing bases where it can share overheads and logistics, reducing costs and boosting margins, analysts say.

Backed by a balance sheet of US$23.5 billion, Wilmar can fund its rice and wheat expansion through its US$1 billion capex. China Agri plans to spend US$1.1 billion this year.

And Wilmar can channel wheat and rice products to its existing edible oil customers — noodle manufacturers Tingyi and Want Want.

“We believe Wilmar is capable of adding 4 million tonnes,” said Hwang-DBS analyst Ben Santoso, basing that on five 400,000 tonne capacity plants for both rice and flour.

“Compared to its last published capacity of 890,000 tonnes, it’s an extraordinary expansion.” THE END

Source: The Malaysian Insider