Wilmar delivered a strong set of results for 9MFY08, mainly on betterperformance posted by the refining and oilseed processing segments.Being the world’s largest palm oil refiner, we believe that increasedpalm oil production in Malaysia and Indonesia has contributed to thejump in Wilmar’s refining volume, while we attribute the remarkableimprovement in margins to timely purchases of raw materials andsales of products, as well as a strong hedge against falling edible oilprices. Generally, we believe that the means for further marginenhancement will be limited, as we expect reduced edible oil pricevolatility in 4Q. Therefore, we believe the strong margin expansion in3QFY08 is not likely to be repeated in the coming quarter.

As previously highlighted, we believe Wilmar has substantially soldforward its CPO production prior to the collapse in prices. Therefore,despite CPO prices falling by over 50% between 2QFY08 and3QFY08, Wilmar’s plantation division only saw a 5% q-q decline inpretax profit.

Meanwhile, margins for consumer packs have improved due toweaker raw material costs. Note that Wilmar has cut selling prices by12% in August, but given that the fall in feedstock costs wassignificantly larger than the cut in selling prices, we expect furthermargin expansion for this division in the coming quarter. Also, volume should also bestronger in the immediate term with customers increasing their purchases ahead of theLunar New Year festival.

Wilmar’s balance sheet has strengthened, as the sharp decline in commodity priceshas lowered its working capital requirement, resulting in a fall in net gearing from 0.52x(as at 31 December 2007) to 0.41x. If adjusted for liquid working capital, Wilmar’s netgearing would be even lower at 0.12x. Meanwhile, its cash reserves surged fromUS$968mn to US$3.7bn. As we have argued, the tight credit market is not likely toaffect Wilmar’s liquidity in terms of securing necessary funds for its businessoperations. Wilmar’s credit facilities remain strong with an outstanding balance ofUS$3.9bn (total liquidity is US$4.9bn, inclusive of US$1bn of excess cash). As close to75% of the total credit facilities utilised are trade finances and, hence, secured byreceivables and inventories, we do not foresee any refinancing issues.

In addition, its cash conversion cycle has improved from 61 days (as at 31 December2007) to 51 days, due mainly to lower inventory and receivable turnover days

As mentioned, one of the key factors that have helped to enhance margins was thepresence of a disciplined hedging policy. This is evident by a gain on derivativeinstruments (essentially plain-vanilla instruments) of US$448mn in 3QFY08 versus aloss of US$46mn in 2QFY08. The gain in 3Q was substantial, because of the collapsein commodity prices, a testimony of Wilmar’s successful commodity price riskmanagement. Rightfully, the gain should not be viewed in isolation, because a hedgingstrategy would mean gains on derivatives are accompanied by losses on the physicalassets. Also recall that Wilmar has good market intelligence in the demand and supplydynamic of edible oils, owing to its extensive global footprint and superior integratedbusiness model, which leads to an effective hedging strategy. We believe Wilmar hassolid timing and trading capabilities, given the continued expansion in refining andcrushing margins since the completion of its merger exercise in 2Q07.

On foreign exchange risk management, Wilmar only suffered a marginal forextranslation loss of US$12mn in 3QFY08, compared to circa US$60mn (or RM212mn)loss for IOI Corp in 1QFY09. In addition, IOI Corp has also incurred a realised forexloss of US$28mn (or RM100mn) versus an estimated forex gain of US$20mn forWilmar in the same quarter. Although IOI Corp is not entirely comparable to Wilmar, itis seen as a close peer to Wilmar due to it having international downstream operations.On the weakening rupiah, we do not expect any adverse impact on earnings, giventhat sales proceeds of its Indonesia businesses are denominated in US dollars, whilecost is denominated in the weaker domestic currency.

Given the consistent good performance recorded by the merchandising & processingdivision, we are raising the respective margin for the refining and oilseed segments toUS$26-31/tonne (from US$25-27/tonne) and US$33-50/tonne (from US$29-38/tonne)for FY08-10F. Our earnings sensitivity suggests that for every US$1 change in marginper tonne, Wilmar’s earnings would change by 2.6%.

We are lowering our CPO price assumption by 12-17% to RM1,900/tonne in FY09Fand RM2,200/tonne in FY10F, due to the reduction in our crude oil price assumption toUS$60/bbl (Oil under water, 14 November). We generally believe that Wilmar’splantation division could post better performance than its peers, due to its ability topreserve, if not enhance, profit margin through solid risk management. We are leavingour forecasts for the consumer pack division unchanged.

All in, we revised upward our FY08F earnings by 29%, due to higher marginassumptions for the merchandising & processing division. However, this increase waslargely offset by a lower CPO price assumption for FY09-10F, resulting in only a 4%earnings revision.

Given its substantial cash coffers, we believe that the current economic and financialturbulence would present good opportunities for Wilmar to extend and expand itsbusiness operations via M&A investments. We have also reduced its annual newplanting programme from 40k to 20k, as we believe the opportunities to acquiredistressed smaller-scale plantation are abundant in this current downcycle and, hence,lowering the requirement for greenfield expansion.

Wilmar remains as our top pick for the sector and we maintain our BUYrecommendation. Our price target of S$3.30 is based on sum-of-the-part valuationmethodology (exhibit 6). This implies a FY09F P/E multiple of 13x, which is at a 15%premium to plantation peers. We think a premium valuation is warranted, given that itsintegrated business model will be more resilient during a downcycle period. In addition,we believe Wilmar is in a better position to benefit from M&A opportunities in view of itscash pile.

Key risk to our valuation is the possibility of a faster pace of decline in consumption ofstaple food products, which could lower our earnings estimates due to lower salesvolume for the merchandising & processing and consumer pack divisions.