Wilmar International - RHB Invest 2024-08-12: Good ESG Rating, But Unexciting Earnings Prospects

• The plantation industry is at the crossroads – with rising costs, falling yields, little chance for landbank expansion, where can growth come from? Planters are having to do a lot more to boost their bottomlines, so is diversification the key? Wilmar International (SGX:F34) is already very diversified but this can also prove to be an earnings drag, when one or more units are not performing.
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Face the hard facts, and adapt.

• With headwinds like lower yields, older trees, environmental pressures, higher costs, labour issues and lower profitability, the sector has to find ways to circumvent these. CPO prices have risen to highs unseen in the last 10 years, but there is always a risk that extenuating circumstances can push prices down to below breakeven cost levels.
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Diversification may be the name of the game, going forward.

• Some planters have already diversified into other industries like property, fruit farming, glove manufacturing and dairy farming. In recent times, we have seen more ESG-friendly diversification like producing wood and fertiliser, etc and using palm oil waste. However, other than ventures that take advantage of their landbank like land sales and property development, none of these have moved the needle in terms of earnings contributions.
• With landbank monetisation like data centres or renewable energy ventures like solar farms now being a feasible diversification, this may change going forward, if more planters opt to engage. We estimate profitability/ha/year for solar is 26x more than oil palm.

Beyond earnings diversification

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Singapore Research RHB Securities Research | https://www.rhbgroup.com/ 2024-08-12 SGinvestors.io

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