China slump weighing heavily on Wilmar stock

Even more volatility seen ahead.

The most recent economic data from China suggests a still-sluggish manufacturing industry, which according to OCBC Investment Research, could resultin even lower-than-forecasted GDP growth.

This development has pummeled Wilmar stock due to its exposure in China via its oilseeds crushing and consumer pack business and will likely result in greater volatility in the near-term horizon, added the research firm.

Here's more from OCBC:

China sees potentially slower growth. Economic data out of China continues to remain sluggish, with the HSBC’s flash PMI number falling sharply to 48.3 in Jun from 49.2 in May, which was not only weaker than expected (consensus of 49.1), but it also shows that the contraction in manufacturing is much faster than expected. Although Bloomberg still has consensus GDP forecast for China at 7.8%, market watchers believe that further downgrades are likely, and China could potentially see a GDP growth of 7.5% this year or lower.

Volatile price swing over last two weeks. As a result, Wilmar international Limited (WIL), with its large exposure to China via its oilseeds crushing and consumer pack businesses, certainly felt the impact, given the recent wild swings in its share price over the last week or so. From a low of S$3.11 on 14 Jun, the stock jumped 7.1% to hit a high of S$3.33 on 18 Jun before sliding back 6.3% to almost where it started before recovering slightly to end at S$xxx.

Likely still more volatility ahead. Although CPO (crude palm oil) prices have been fairly stable (modest uptick over the past week), industry watchers note that soy prices could come off sharply due to a more bountiful harvest. Note that WIL had also previously guided for crushing margins in China to ease in 2Q13 as a large quantity of beans will be arriving in China now that the port congestion in Brazil has cleared. Furthermore, lower sugar prices could also weigh on its sugar operations.

Downgrade to HOLD. While we are maintaining our FY13 and FY14 estimates, the less “risk on” approach taken by the current market will result in our valuation peg easing from 15x to 12.5x and our fair value dropping from S$3.90 to S$3.25. Downgrade to HOLD.