The Straits Times
www.straitstimes.com
Published on Jan 08, 2013
COMPANIES
Wilmar may continue its slump
HONG KONG - Wilmar International, the worst performing stock on the Straits Times Index (STI) last year, may extend its slide this year as investors favour agricultural companies that rely less on trading.
Wilmar, the world's largest palm oil processor, lost 33 per cent 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 per cent, 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's accounts by short-seller Carson Block's Muddy Waters made some wary of buying into agricultural companies, even as a growing global population fuels demand for food.
Some investors and analysts have highlighted that producers engaging in trading activities potentially carry more risk.
"The concept of agriculture and food resources is absolutely a valid concept," said Mr Hugh Young, who helps manage about US$70 billion (S$86 billion) of Asian equities at Aberdeen Asset Management Asia in Singapore and does not hold Wilmar or Olam.
"Some are trading companies with which we feel naturally a little uncomfortable because the trades can go both ways," he said.
Wilmar's slide compares with a 20 per cent gain for the benchmark STI last year.
Olam, which was targeted by Mr Block in November, lost 27 per cent 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.
Analysts have a 12-month price target of $3.38 on average, on Wilmar. Seven analysts recommend selling Wilmar stock, nine advise buying it and 11 rate it "hold".
Profit at Wilmar may have shrunk 31 per cent to US$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 US$1.35 billion this year, still 16 per cent lower than that of 2011, according to the average of 21 analyst estimates compiled by Bloomberg.
DBS Group Holdings analyst Ben Santoso said he still expects a weak contribution this year from Wilmar's oilseeds unit - which processes soybeans into meal and oil - after it posted losses in the first half of last year. The loss was partly blamed on bad timing of bean purchases.
Margins on processing soybeans, known as crushing, will probably "return to positive territory but it's not going to be a major driver", said Mr Santoso, who is based in Singapore. Overcapacity in the industry will continue to affect the unit's profitability, he added.
Olam, the world's second-largest rice trader, may struggle to shed concerns about its accounts and strategy raised by Mr Block and his research firm Muddy Waters. The commodity trader said last week that it is in the best financial health since its 2005 initial public offering and is "comfortable" with its debt.
Mr Carey Wong, a senior analyst at OCBC Investment Research, said in a Dec 12 report: "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."
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 per cent in the three months ended Dec 31, according to the median of 35 economist estimates compiled by Bloomberg.
Aberdeen's Mr Young said he prefers pure producers such as United Malacca and United Plantations, which are both traded in Kuala Lumpur.
"We prefer simpler, more plain-vanilla-type companies."
United Malacca gained 5.4 per cent last year and United Plantations advanced 32 per cent 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, the world's second-biggest palm oil producer, declined 9.1 per cent last year. That made it the third-worst performer in Singapore, yet it out-performed Wilmar and Olam.
The stock has dropped amid a 23 per cent 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 Ms Julie Tay, an investment manager at Scottish Investment Trust, which oversees about US$1 billion in assets. "The positive and negative factors for palm oil look quite balanced in the near term."
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