CIMB Research said Wilmar’s consumer products unit in China may see a margin squeeze after the government asked producers to avoid raising edible oil prices “unless it is absolutely necessary”, although there is no control on cooking oil prices.
“This news could trigger near-term selling pressure on the stock. Given its underperformance relative to the market, we believe that this news has been more than priced in. But we do not advise additional exposure to the stock,” CIMB said.
It estimates that China’s move could drain 3% from the group’s 2012 fiscal year earnings if edible oil prices trend higher. Wilmar will report its second-quarter result on Aug. 14.
Wilmar shares were down 0.3% at $3.27 on Monday after falling 8.4% l ast week. The stock has dropped more than 34% so far this year versus the 14% gain in the Straits Times Index, making it the worst performing stock on the index.
Wilmar is the largest producer of consumer pack cooking oil in China with around 50% market share, CIMB said. The consumer products division made up 4.5% of the group’s 2011 fiscal year pre-tax profit, it added.
Citigroup said investors have feared that Wilmar’s weakness in oilseeds in the last two quarters will extend into the second half of 2012 and the consumer division will be weaker than expected, but the impact may be better managed in this cycle than in 2008.
China’s inflationary pressure is currently lower versus the 2008-levels and authorities have historically allowed for price increases as China relies on imports for soybeans and has to pay international prices for these imports, Citi said.
Wilmar’s valuations are attractive, Citi said, adding that it believes earnings should show some recovery in the second half versus the previous six months as the industry will likely not continue to grow crush volumes if losses continue to widen.
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