Wilmar Stock Slump May Extend on Trading Concern: Southeast Asia

Wilmar International Ltd., the worst performing stock on Singapore’s Straits Times Index in 2012, may extend its slide this year as investors favor agricultural companies that rely less on trading.

Wilmar, the world’s largest palm oil processor, lost 33 percent last year, its third annual drop in a row, as profit missed analysts’ estimates in three of the four quarterly reports issued during the year. The company’s stock may fall 6.1 percent, based on the average of 21 analysts’ 12-month target prices compiled by Bloomberg.

The company slumped as commodities including palm oil and sugar declined last year. The questioning of Olam International Ltd.’s accounts by short-seller Carson Block’s Muddy Waters LLC made some wary of buying into agricultural companies, even as a growing global population fuels demand for food. Some investors and analysts also highlight that producers engaging in trading activities potentially carry more risk.

“The concept of agriculture and food resources is absolutely a valid concept,” said Hugh Young, who helps manage about $70 billion of Asian equities at Aberdeen Asset Management Asia Ltd. in Singapore and doesn’t hold Wilmar or Olam. “Some are trading companies with which we feel naturally a little uncomfortable because the trades can go both ways.”

Wilmar’s slide compares with a 20 percent gain for Singapore’s benchmark index in 2012. Olam, which was targeted by Block in November, lost 27 percent last year, its second straight yearly loss and the second-worst performance on Singapore’s main index. Wilmar and Olam, both based in Singapore, declined to comment on their share price performance.

Earnings Slump

Wilmar gained 0.3 percent to S$3.60 in Singapore today, compared with a 0.2 percent fall in the Straits Times index.

Analysts have a 12-month price target of S$3.38 on average. Seven analysts recommend selling Wilmar stock, nine advise buying it and 11 rate it hold.

Profit at Wilmar may have shrunk 31 percent to $1.1 billion in the year ended Dec. 31, the lowest since 2007, according to 21 analyst estimates compiled by Bloomberg. The company may post net income of $1.35 billion this year, still 16 percent lower than 2011, according to the average of 21 analyst estimates compiled by Bloomberg.

Analysts such as DBS Group Holdings Ltd.’s Ben Santoso still expect a weak contribution from Wilmar’s oilseeds unit this year, which processes soybeans into meal and oil, after it posted losses in the first half of 2012. The loss was partly blamed on bad timing of bean purchases.

Margins on processing soybeans, known as crushing, will probably “return back to positive territory but it’s not going to be a major driver,” Santoso said by phone from Singapore. Overcapacity in the industry will continue to affect the unit’s profitability, he said.

Muddy Waters

Olam, the world’s second-largest rice trader, may struggle to shed concerns about its accounts and strategy raised by Block and his research firm Muddy Waters. He first questioned Olam’s accounting methods at a London conference on Nov. 19, and later said the company may collapse in a 133-page research report rating it a strong sell.

Olam rejected the claims and sued Block and Muddy Waters in Singapore on Nov. 21. The commodity trader said last week it’s in the best financial health since its 2005 initial public offering and is “comfortable” with its debt.

“Besides the still gloomy economic outlook, investors’ appetite toward commodities-related players -- especially those with complex business models -- is also likely to remain lukewarm in the wake of the recent saga involving Olam and Muddy Waters,” Carey Wong, a senior analyst at OCBC Investment Research Pte., said in a Dec. 12 report.

Temasek Backing

Wong rates the commodities sector “underweight” and expects Olam to fall to S$1.44, lower than the S$1.68 closing price on Jan. 4. Still, the average 12-month target price of 16 analysts’ estimates compiled by Bloomberg is S$1.83. The stock lost 2.4 percent to S$1.64 in Singapore trading at the close.

Olam, which counts Singapore state investment company Temasek Holdings Pte as its second-largest shareholder, has 11 buy ratings, six holds and four sells, according to data compiled by Bloomberg.

Temasek raised its stake in Olam to 19 percent last month and will buy any rights not taken up by other investors in the commodity company’s proposed $1.25 billion bond and warrant offering.

Demand for agricultural commodities may be supported by a rebound in China, the biggest consumer of soybeans, which is poised to snap a seven-quarter slowdown as growth probably accelerated to 7.8 percent in the three months ended Dec. 31, according to the median of 35 economist estimates compiled by Bloomberg.

Pure Producers

Aberdeen’s Young said he prefers pure producers such as United Malacca Bhd and United Plantations Bhd, which are both traded in Kuala Lumpur. “We prefer simpler, more plain-vanilla type companies.”

United Malacca gained 5.4 percent last year and United Plantations advanced 32 percent in Kuala Lumpur trading.

“The plantation companies we like have an area with ground, with trees, and they produce palm oil,” he said. “It’s quite tangible. Land assets, land rights are very visible.”

Singapore-based Golden Agri-Resources Ltd., the world’s second-biggest palm oil producer, declined 9.1 percent last year. That made it the third-worst performer in Singapore, yet it outperformed Wilmar and Olam.

Golden Agri

The average 12-month target price for Golden Agri-Resources’ stock is 74 Singapore cents, compared with close of 66.5 cents on Jan. 4, based on 19 analysts’ predictions compiled by Bloomberg. The stock dropped 0.8 percent to 66 cents today.

Profit at the Singapore-based producer may have plunged to $494.7 million in 2012, the lowest since 2006, according to 17 analyst estimates compiled by Bloomberg. The stock has dropped amid a 23 percent retreat in palm oil, as customers cut orders and inventories piled up.

“It is hard to be really bullish on the sector at the moment,” said Julie Tay, an investment manager at Scottish Investment Trust Plc, which oversees about $1 billion in assets. “The positive and negative factors for palm oil look quite balanced in the near term.”

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