3Q23 Results Preview: Pressure On Palm Refining Margins Intensifies
We are revising down our earnings estimates again and this is after taking into consideration tough palm refining operations and China’s slower-than-expected recovery. In the upcoming 3Q23 results, we are only expecting Wilmar to report a core net profit of US$300m-320m (vs 3Q22’s US$796.7m and 2Q23’s US$195.1m). Note that the record-high profit in 3Q23 was due to palm refining margins at the higher-ever level caused by market distortions. Downgrade to HOLD. Target price: S$3.80.
WHAT’S NEW
• Recovery expected to be weaker and slower. The worst could be over for Wilmar International (Wilmar) as we had highlighted in our note in Aug 23. However, the recovery pace is at an unexpectedly slower pace, and pressure on palm downstream margins is not easing given the intensified competition from competing vegoil in 3Q23.
• 3Q23 earnings likely to be weaker than our initial expectation. Wilmar is scheduled to release its executive financial summary for 3Q23 on 26 Oct 23 after trading hours. Based on key market indicators and trends, we are expecting a core net profit of US$300m-US$320m for 3Q23, which could be its lowest 3Q profit since 2017. Note that 3Q has always been the best quarter for Wilmar due to the festive demand in China and India. Our US$300-320m expectation is a significant drop from 3Q22’s US$796.7m. However, this sharp drop should not come as a surprise as back in 3Q22, all palm downstream processors reported their best-ever margins in history due to the market being distorted by the various policies changes in Indonesia. We estimate that palm refining margins in 3Q22 ranged between US$100-120/tonne vs 3Q23’s US$5-15/tonne. Palm refining margins normally range between US$10-20/tonne.
• Downgrading earnings again. We adjust down our earnings estimates for 2023/24/25 by 18%, 9% and 8% respectively. This comes after our downward revisions in Aug 23 after its 1H23 briefing. This revision mainly takes into consideration weaker-than-expected PBT margin from Feed & Industrial Products segment. Key contributors to this segment would be palm downstream processing and soybean crushing. Both sub-segments are facing intense pressure on PBT margins. Palm processing margins are under tremendous pressure as the competitive pricing offered by sunflower and soybean oil from Black Sea is eating into palm market’s share. Meanwhile, the fertiliser division is likely to post losses as prices continue trending down, which will partially offset the better contribution from sugar milling (higher
sugar prices).
