Brokers' Call: Wilmar International

A palm oil factory outside Kuala Lumpur. Higher biodiesel consumption in Indonesia will benefit Wilmar's tropical oils division.
A palm oil factory outside Kuala Lumpur. Higher biodiesel consumption in Indonesia will benefit Wilmar's tropical oils division.PHOTO: REUTERS

WILMAR INTERNATIONAL
Broker: CIMB Research
Target Price: $3.49
Call: Add

The key takeaways from Wilmar's results briefing are: Concerns over its unwinding of carry trade proved unfounded; the rice and flour businesses in China have turned profitable; higher biodiesel consumption in Indonesia will benefit its tropical oils division; it has no plans to venture into property in the immediate term; and it is keen on mergers and acquisitions at the right price.

Wilmar provided a detailed explanation of its finance and hedging costs for the past two years to articulate that the unwinding of the carry trade will not have a significant impact on earnings.

Carry trade refers to the group's treasury activities of borrowing in US dollars and parking its cash in yuan deposits, allowing it to enjoy lower net interest costs of 1.74 per cent versus the average borrowing rate of 3.14 per cent in 2015.

Assuming net interest costs revert to market rate, we estimate it will raise borrowing costs by US$161 million.

However, this is expected to be offset by improving processing margins for its oilseeds.


OUE
Broker: Maybank Kim Eng
Target price: $2.04
Call: Hold

Although cheap relative to history, the stock is unlikely to perform, given unrelenting headwinds for its residential project and large exposure to Singapore's prime office oversupply.

The 2015 financial year reported income was $156.4 million (-85.7 per cent year on year) due to one-offs.

The decline reflected a $1 billion gain from the deconsolidation of OUE Hospitality Trust last year.

OUE booked a $23.2 million impairment charge for 99-year-leasehold OUE Twin Peaks. Sales remained weak with only 16 per cent or 72 of its 462 units sold. The project has a Qualifying Certificate deadline of early 2017 and OUE will need to start paying penalties on unsold units then.


CSE GLOBAL
Broker: OCBC Investment Research
Target price: 48.5 cents
Call: Buy

CSE Global Limited's 2015 financial year profit after tax and minority interests (Patmi) from continuing operations were within expectations, declining 6.4 per cent to $31.2 million on the back of a 1.1 per cent drop in revenue to $412 million.

CSE's 2015 gross margins from continuing operations were stable at 28.7 per cent, attributed to better sales mix of brownfield jobs, which command higher gross margins. Operating expenses were 4.8 per cent higher, mainly due to inclusion of expenses of the newly acquired Crosscom business and higher provisions for doubtful debts.

With 80.1 per cent of CSE's 2015 revenue derived from oil and gas sector customers, we believe capital expenditure cuts by oil majors will lead to a decline in the number of large greenfield projects in the market.

Nevertheless, we believe CSE's earnings will remain relatively resilient due to its large exposure to recurring brownfield projects.

Its intention to acquire accretive businesses will also help to soften the impact.

Therefore, we cut our 2016 Patmi forecast and consequently lower our fair value from 54 cents to 48.5 cents.

Maintain "buy", supported by a decent 2016 forecast dividend yield of 5.4 per cent.

A version of this article appeared in the print edition of The Straits Times on February 29, 2016, with the headline 'Brokers'Call'. Print Edition | Subscribe