In the short term, however, Cai opines that Wilmar might see some upside with a decline in soybean future prices.
In addition, Wilmar’s share price decline following news of the soybean tariff has also brought it to “a fairly attractive level,” Cai says.
RHB is keeping its “buy” call on Wilmar with an unchanged target price of $3.45.
China’s retaliatory move came less than 24 hours after the Trump administration proposed tariffs on Chinese imports into the US, including high-tech goods.
But should the tit-for-tat spat spiral into a full-blown trade war, Cai says it is likely to be negative for Wilmar.
“The 25% tariff would certainly increase the input costs for oilseeds crushers,” she says. “Theoretically, China could seek alternative suppliers from Brazil and Argentina, or import more of other oilseeds. However, we believe this move would have a knock-on effect, raising South American soybean prices as well as the prices of other oilseeds.”
Meanwhile, there is also a strong demand for soybean from China’s livestock industry. Soybean, when crushed, produces soybean meal as its main ingredient, which is the key protein source used in China’s livestock feed.
“We think it’s almost impossible to entirely replace the imports from the US with other crops,” Cai says.
With the planned 25% tariff on US soybean imports likely to also hurt China’s own pork producers and raise pork prices, Cai says it is unclear how long China would be able to keep up the tariffs.
China is the world’s largest producer and consumer of pork, which is considered a staple food in the country.
“Right now, it is unclear when the tariffs would take effect. This could eventually be negotiated down, as this tariff risks both the livelihood of US soybean farmers and China pig farmers. It would also potentially drive up food prices for China,” she says.
As at 11.54am, shares of Wilmar are trading 3 cents up at $3.11, implying a price-to-earnings ratio of 12.4 times, a price-to-book ratio of 0.9 times, and a dividend yield of 3.2% for FY18.
