Wilmar margin squeeze to ease soon
Profit-battered segments like palm & lauric and oilseed & grain could rebound as crush margins clear the red.
Wilmar should also benefit from increasing sales in emerging countries where it dominates in market share, leading to better consumer products growth.
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What is the news? Improving fundamental indicators; CPO price increases (average increase of 3% sequentially over 4QFY11), China crush margin improves (back to positive in mid-Mar), China inflation easing off (within target range of official 4%)
How do we view this? Wilmar’s operating margin suffered in the last year, especially in the Palm & Lauric and Oilseed & Grain segments. We believe these two segments will improve sequentially base on preliminary revenue indicators.
Oilseeds & Grains to rebound on improving crush margin. The Oilseeds & Grains segment almost went into the red in 4QFY11. Correspondingly, China soybean crush margin was mostly in the negative regions and dived deeply south during the 4QFY11. However the crush margin has returned to positive in mid-March 2012. Therefore we expect this segment to register positive growth.
Consumer products. We believe sales volume of consumer products will continue to grow, led by urbanization in the emerging countries which Wilmar has a leading domestic market share. The sales trend has also display steady growth. The consumer products division is the last stop of the value chain and profitability hinges on the ability to raise end retail prices. Margin was affected seriously by China’s price control during the most part of last year when the country’s inflation ran amok. However margin has rebounded from 2QFY11 as inflation started to ease. China has an inflation target of 4% for FY2012. Food price CPI has eased off significantly from the peak.