Wilmar International - CGS-CIMB Research 2019-03-11: Buying Out Goodman Fielder Co-Investor

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Buying Out Goodman Fielder Co-Investor

We are neutral on Wilmar International's plans to buy the remaining 50% stake in Goodman Fielder as the deal will not materially impact near-term earnings. The acquisition is in line with its plan to grow its consumer products business.
Maintain ADD and SOP-based Target Price of S$3.96.
Listing of Wilmar China is a key potential re-rating catalyst.
Downside risk: weaker-than-expected earnings.

Wilmar International (SGX:F34) has entered into a share purchase agreement to acquire the remaining 50% stake (including shareholder loans of US$95m) in FPW Singapore Holdings (FPW), from First Pacific (142 HK) for US$275m. The deal comes with a contingent payable of US$25m in 2021 (if 2020 earnings target is met) and an additional US$25m earn-out payment if the 2020 earnings threshold is exceeded.
FPW Singapore Holdings owns 100% stake in Goodman Fielder (GF). The deal is expected to be completed in 4Q19 and that will result in First Pacific (the seller) recording a non-recurring loss of about US$280m.

Goodman Fielder group (GF) is a leading regional food company across Australia, New Zealand and Asia Pacific. It manufactures, packages, distributes, markets and sells a wide range of food products including bread, milk, cheese, chicken, flour, cooking oils, spreads, baking ingredients, ice cream and snacks. The company owns brands such as Wonder White bread, Meadow Lea margarine and Praise mayonnaise.

Wilmar International invested in Goodman Fielder as early as 29 Feb 2012, when it bought a 10.1% direct stake in Goodman Fielder in the open market, reportedly for A$115m (US$124m). On 17 Mar 2015, First Pacific and Wilmar International paid a combined A$1.3bn (US$934m) to acquire 100% stake in Goodman Fielder via FPW Singapore Holdings. The acquisition raised Wilmar International’s stake in Goodman Fielder via FPW Singapore Holdings to 50%.

We estimate it will cost Wilmar International around US$275m-325m to acquire the additional 50% stake in FPW. The acquisition is not material as it represents 1.7-2% of Wilmar International’s shareholders' funds. However, this is 28-49% lower than Wilmar International’s investment value of 50% stake in FPW of US$543.4m in its book as at 31 Dec 2017. We gather that this could be due to the more challenging operating environment Goodman Fielder faces in Australia.
Following the proposed deal, we estimate Wilmar International’s investment in FPW could be raised to c.US$818m-868m.

We are neutral on this development as it is unlikely to significantly impact Wilmar International’s earnings in the near term. FPW contributed US$21.9m/US$37.1m/(US$10.8m) to Wilmar International’s FY15/16/17. We gather that FPW's losses in FY17 were due to restructuring costs.
We estimate that the proposal will have minimal or less than 1% impact on our earnings forecasts for Wilmar International, but could raise its net gearing position as it will need to consolidate FPW's debts. We are positive on the investment in the longer term as it will help Wilmar International expand its consumer products division.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-11

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