Downgrades on Wilmar

Wilmar International fell after analysts cut their price targets for the company on concern profit margins may drop, and palm oil plunged. The company cut selling prices for edible-oil products by about 12%, effective yesterday, the company said.

"We expect Wilmar's merchandising and processing margin to soften," wrote Ben Santoso at DBS Vickers, who cut his recommendation to "hold" from 'buy." The change was driven by "the deceleration of the renminbi appreciation against the US$, and softer CPO and oilseed prices,'' he said.

Wilmar, which supplies about 45% of China's retail cooking oil, reports earnings in dollars and a slower rate of appreciation for the Chinese currency may crimp profit growth. Royal Bank of Scotland Group cut its forecast for the yuan, saying the central bank was reining in yuan appreciation.

"About half of Wilmar's profits are derived from China," Tan Ting Min, a research analyst at Credit Suisse, wrote in a note. Tan cut Wilmar's price target to $4.80 from $5.40.

"With further softening in edible oil prices since end-Jun '08, the group has decided to lower its selling prices by approximately 12%,'' Wilmar said in the slides presentation. Still, "in spite of lower palm oil prices, palm plantation still has attractive margins," the slides read.

The price of palm oil was likely to "remain subdued" unless crude oil rallied, Wilmar said yesterday, without giving a forecast. CEO Kuok Khoon Hong warned of a "more challenging operating environment" this year.

The yuan has gained 6.9%t against the dollar this year, according to Bloomberg data.

Wilmar's net income in 2Q08 gained to US$331.7 m from US$101.5 m a year earlier. Sales advanced to US$7.8 b from US$3 b. The figures met expectations, DBS's Santoso wrote.

To be sure, Fordyanto Widjaja, an analyst at Morgan Stanley Asia, wrote in note that he remained bullish on Wilmar's profit outlook as the lower prices of agricultural commodities "is sentiment-driven" and "will be temporary."