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Shareholders Of Wilmar International Limited Might Want To Take A Deep Breath Before Clicking

Wilmar

The giant commodities trading firm Wilmar international Limited (SGX: F34) announced its second quarter results just yesterday. And, the results weren’t pretty: the firm’s net profit for the first half of 2014 had dropped by almost a third compared to a year ago.

Highlights

Wilmar International has five main business segments: Palm & Laurics; Oilseeds & Grains; Sugar; Consumer Products; and Plantations & Palm Oil Mills.

It was the first three segments that dragged down Wilmar International’s overall results for the six months ended 30 June 2014. Let’s start with Palm & Laurics. The segment saw its pre-tax earnings fall by 41% year-on-year to US$261.8 million due to two main factors: 1) A lower supply of crude palm oil; and 2) the appearance of excess refining capacity in the industry. Both dynamics led to lower margins for the segment.

Moving on to Oilseeds & Grains, the segment suffered a pre-tax loss of US$53.3 million, a far cry from the pre-tax profit of US$62.4 million that was earned a year ago. Lastly, we have Sugar, which saw its losses deepen by 77% from US$43.9 million a year ago to US$77.8 million. However, it’s important to note here that Wilmar International’s Sugar segment has typically reported losses in the first half of a calendar year due to the harvesting cycle of the sugar-cane crop.

Wilmar International’s Consumer Products and Plantations & Palm Oil Mills segments were the two bright spots. The former benefitted from much higher demand and lower feedstock costs and so ended the first half of 2014 with a 25% year-on-year increase in pre-tax profit to US$108.4 million. Meanwhile, pre-tax profit for the Plantations & Palm Oil Mills segment enjoyed a 74% increase to US$217.5 million on the pack of higher palm prices and a better production yield. Generally, the performances of Wilmar International’s Plantations & Palm Oil Mills segment would have a negative correlation with its Palm & Laurics segment. That’s because the former acts as feedstock for the latter; so if Plantations & Palm Oil Mills does well, that would mean that Palm & Laurics would get pricier feedstock, thus leading to a poorer performance.

So, all the above meant that Wilmar International’s overall core profit after tax had dropped by 32% year-on-year to US$378 million for the first half of 2014. This is despite the company experiencing a 1% increase in revenue to US$20.8 billion.

Wilmar International also increased its net gearing ratio from 0.83 times at the end of last year to 0.88 times as of 30 June 2014. Investors should watch that gearing ratio.

The only good news

The only piece of celebratory news to take out from the company’s second quarter earnings is that the worst might be over.  The following are comments given by Mr. Kuok Khoon Hong, Chairman and Chief Executive of Wilmar International, on the company’s outlook for the rest of the year:

“Lower prices due to improved global oilseed supplies, less excessive imports of beans into China and higher seasonal demand in the second half of the year should further improve crush margins in the coming months. Consumer Products, with its wide product portfolio, should continue to grow across all our markets. As we enter into the traditional peak season, Plantations & Palm Oil Mills should report better contributions. Increased supply of CPO will help to improve Palm & Laurics performance even though operating conditions will remain challenging. Barring any bad weather in the coming months, Sugar will contribute positively with the commencement of the crushing season in June. Overall, we expect much better performance in the second half of the year.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Wilmar International