Wilmar Tumbles After Warning of Challenging Months Ahead

  • Processing margins are pressured by gains in palm oil price
  • Wilmar least leveraged major producer to price increases

Wilmar International Ltd. dropped the most in eight months in Singapore trading after the world’s largest palm oil trader warned of challenging operating conditions in coming months.

Its shares fell 3.5 percent to close at S$3.29, the biggest decline since Sept. 7, paring gains this year to 12 percent. The company said processing margins are being pressured when it reported earnings after the market closed Tuesday.

While a recent rally in palm oil will benefit its plantation segment, higher prices will curb margins in its downstream business, Chief Executive Officer Kuok Khoon Hong said in the statement Tuesday. Volatility in sugar prices will also impact the company, and crush margins are expected to be pressured by "excessive soybean arrivals in China".

“The market may be slightly concerned on the guidance for the challenging second quarter on the back of crush margins that may be weaker,” Ivy Ng, regional head of plantations at CIMB Investment Bank Bhd., said by phone in Kuala Lumpur on Tuesday. CIMB cut its rating on Wilmar to hold from add on Wednesday.

The Singapore-listed company reported first quarter net income rose 3.2 percent to $239.4 million from a restated $232 million a year earlier, amid a steady performance in its tropical oils and oilseeds units. Revenue fell 4.3 percent to $9 billion from $9.4 billion, it said.

Least Leveraged

Palm oil futures are up about 8 percent this year as El Nino-induced drought squeezes supplies in top growers Indonesia and Malaysia. Yet while Wilmar’s prospects in 2016 have brightened as palm rebounds, it is the least leveraged of the major producers to rising prices and is more of a downstream player, Credit Suisse Group AG said in a May 4 note.

“The company will feel some margin erosion in the second quarter unless they’re willing to increase their selling price to help offset the margin contraction,” Angeline Chin, analyst at TA Securities Holdings Bhd. in Kuala Lumpur, said by phone on Wednesday. Chin has a hold call on Wilmar with a target price of S$3.84, and says she doesn’t plan to re-rate the stock anytime soon as its fundamentals are still intact.

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