On 4 February 2009, Wilmar announced a streamlining of shareholding exercise whereby its controlling shareholder, Wilmar Holdings Pte Ltd (WHPL, a 48.2% substantial shareholder), will liquidate and distribute Wilmar shares in specie to its ultimate shareholders, one of whom includes Wilmar International Holdings Limited (WIHL), which holds a 91.3% stake in WHPL.

The key reason for this exercise is to improve the free float of Wilmar, from 13.7% to 24.1%, but markets are not regarding this exercise positively, we believe due to concerns over possible share overhang or share disposal by individual shareholders who now directly own a stake in Wilmar (previously, they owned shares indirectly through WHPL or WIHL).

We, however, believe that there is a low possibility of any divestment by these strategic shareholders. Both Archer Daniels Midland (ADM) and COFCO are in the agribusiness industry, which suggests that they could reap complementary benefits from Wilmar’s existing operations. We believe that COFCO, being a state-owned enterprise in China, would want to maintain its holding in Wilmar, given its dominance in China’s edible oil and grain market.

We feel that this exercise would be a positive for Wilmar, as the increase in free float is likely to lead to a higher weighting for the stock in major indices such as MSCI, FTSE All World and FTSE- STI. Nevertheless, this exercise is expected to complete by mid- 2010. Hence, we believe any possible rebalancing should only take place in 2H 2010.

For FY09F, we are projecting a 14% earnings contraction on the back of lower margins and weaker volume growth. We note that FY08 was an exceptional year for Wilmar, due to a significant jump in margins on the recognition of trading gains (it probably benefitedfrom its dominance of the global supply chain and strong market intelligence). We do not expect this strong performance to be repeated in FY09F and, hence, we forecast a drop in the company’s earnings. Nevertheless, compared with the company’s upstream palm oil peers, Wilmar should see a relatively smaller decline in earnings, due to its integrated business model, in our opinion.

We believe the recent weakness in the share price presents a good buying opportunity. We maintain a BUY rating on Wilmar with a price target of S$3.30, based on SOTP (no change). The risk to our target price is lower-than-expected earnings due to a sharp decline in sales volumes on global economic recession.