How Wilmar will be hurt by China bird flu scare

Soya meal demand dropped 20%.

According to CIMB, Wilmar revealed that 2Q earnings may be weaker qoq as bird flu has led to a drop of around 10-20% in soya meal demand in China and refining margin may weaken when new refining capacity comes onstream in Indonesia.

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There is also concern that sugar profitability may be diluted as  sugarcane yield from its mills may be hit by the "yellow canopy syndrome" disease.

But these are short-term negatives that do not shake our Outperform rating, which is underpinned by its cheap FY12 P/BV of 1.2x vs. the historical average of 2.1x. We maintain our SOP-based target price.

What Happened.
Wilmar International's CFO, Mr Ho Kiam Kong, Head of Investors'Relations Miss Lim Li Chuen and Investor Relation executive Miss Cai Yanning attended our Annual Asia Pacific Conference in KL today and provided updates on the group's business model and prospects.

Investors were keen to know the group's view on CPO prices and the outlook for soybean crushing and refining margins. Management also alerted investors to the possibility of a dent in its sugar profitability in Australia from the yellow canopy syndrome.

But it added that it is too early to assess the impact as crushing activities started only 10 days ago.

What We Think. The group's indication of a potential qoq drop in 2Q earnings is undeniably negative but is partially imputed in our earnings forecasts.

The drop reflects seasonality, weaker soya meal demand in China due to bird flu concerns and a normalising of refining margins to US$25-30 per
tonne as additional palm oil refining capacity comes onstream.

We continue to project palm refining margins of US$30/t for FY13 compared with US$39.5 in 1Q13. Thegood news is that soya meal demand in China has started to recover and Wilmar expects demand to return to normal sometime in 3Q.

It projects flattish hoh CPO price in 2H13 due to tepid Chinese demand.