Wilmar haunted by weak refining margins in Indonesia

Indonesian margins fell to US$45/MT.

According to DBS, based on current price data, it found that spot Indonesian palm oil gross refining margins have now fallen to US$45/MT (from US$77/MT in Dec12) – inclusive of assumed US$20/MT discount to Malaysian refined products.

Here's more:

Meanwhile, Malaysian margins have been flat at US$48/MT (from US$47/MT in Dec12).

The drop in Indonesian margins points to thinning spreads between CPO and refined products export taxes based on prevailing CPO prices. The market has largely priced this in, but we would caution that refining margins might be lower if we impute trade barrier costs (i.e. Indian import tax).

In our report dated 23 Jul12, we speculated that Indian importers might seek lower import prices as compensation for the government's decision to unfreeze the import base price of refined oils. We believe this has happened.

Given recent developments, we believe there is downside risk to our forecast earnings for Wilmar this year due to weaker palm oil refining margins in Indonesia.

This will have more significant near term impact than the measures to contain the spread of bird flu in China. Based on media reports thus far, there has not been a significant drop in Chinese soybean meal demand.

All in, we cut Wilmar's FY13F/14F/15F earnings by 8%/8%/4%, respectively, and trimmed our DCF-based TP to S$3.72/share, implying 15.7x FY13F PE.

We expect 1Q13 earnings to come in at between US$292m and US$308m (or 42-50% higher y-o-y, but 23-27% lower q-o-q). The sequential decline would be primarily due to lower contribution from palm oil refining as well as negative off-peak sugar contribution.

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