Wilmar International, the world’s biggest palm oil processor, reported a less-than- expected 3.7% drop in first-quarter profit as prices of raw materials fell. The shares surged.

Net income fell to US$386.7 million ($480.8 million) from US$401.4 million a year earlier, the Singapore-based company said today in a filing. That beat the US$325 million mean of four analyst estimates compiled by Bloomberg. Wilmar’s loss was partly due to writedowns on the value of convertible bonds.

Plantations and palm oil mills reported a 26% jump in pretax profit, while merchandizing and processing, the biggest earner, rose 3.8% as margins expanded. The new sugar milling unit had a pretax loss.

“They beat street significantly, mostly because of higher crush margins,” Tanuj Shori, an analyst with Nomura Holdings Inc. in Singapore, said in an e-mail. “Stable refining margins also helped. Although sugar milling was negative because of pre- harvest season, it should pick up going forward.”

A boost for Wilmar’s earnings came with the 11% fall in crude palm oil prices in the first quarter as inventories of the edible oil climbed to their highest level in six months in April. With an “improved” supply of crude palm oil, the margins of processing the material grew, Wilmar said.

The better-than-expected results come as Wilmar’s profits are being squeezed in China, where it holds about half of the retail market for cooking oil. The nation has asked suppliers since at least November to refrain from raising prices, making the price of buying the raw materials to make the oil higher than that of the end product.

“The group remains positive on its prospects, despite a challenging operating environment in China arising from the monetary tightening and anti-inflationary measures” taken by the government of Asia’s biggest economy, Wilmar Chief Executive Officer Kuok Khoon Hong said in today’s statement.

Wilmar jumped as much as 3.7%, the most in six months, after declining 22% in the previous 12 months. The stock rose 2.8% to $5.23 on the Singapore stock exchange at 9:18 a.m. local time.

One way to fight lower margins on retail goods in China has been to cut output at local processing operations, which is what Noble has done, Chief Executive Officer Ricardo Leiman said May 11. Wilmar said today it cut sales volumes of processed palm, oilseed and grains by about 14% and made money on hedged sales of the products.

Total revenue climbed 41% to US$9.54 billion for the quarter, helped by higher prices for agricultural commodities. – Bloomberg