Wilmar International 2Q19 - UOB Kay Hian 2019-08-14: Below Expectation; Guiding A Better 2H19


Wilmar International 2Q19 - Below Expectation; Guiding A Better 2H19

  • Wilmar’s 2Q19 core net profit came in below expectations due mainly to lower-than-expected PBT margins from the oilseeds & grains and sugar segments. The weaker results may trigger some selling but investors may still be very much focused on the re-rating potential from YKA listing on the ChiNext of Shenzhen Stock Exchange.
  • Management is guiding for better margins for the crushing business and other segments to perform better in 2H19.
  • Maintain BUY. Target price: S$4.50.


Results below expectations.

  • WILMAR INTERNATIONAL LIMITED (SGX:F34) reported core net proift of US$177m (-29% q-o-q, -50% y-o-y) for 2Q19, below our expectations. The variance was mainly due to lower-than-expected PBT margins from the oilseeds & grains and sugar segments.
  • Our expectation of a recovery in crushing margin may be too early (instead of in 3Q19) and our expectation for the sugar business may need to be adjusted lower.

Better 2H19.

  • Wilmar's 1H19 core net profit was US$427m, or 34% of our and consensus full-year estimates. 2H usually delivered higher profit vs 1H. Historically, 1H core profits were 32-41% of full-year core net profits.
  • A better 2H profit is usually supported by contribution from the sugar division and festive demand to drive sales volume and better margins from consumer packs. Management also guided for a better crushing business in 2H as well. Thus, we do not expect an earnings adjustment for 2019.


Oilseeds & grains: Weak performance.

  • The weak results were mainly due to a lower crush margin at 1.2% for 2Q19 and impact from the African swine fever outbreak despite high sales volume. Also, there was the absence of exceptionally high soybean crushing margins in 2Q18 as soymeal prices surged in China when the US-China trade tension got started.
  • Consumer products maintained its strong performance while rice and flour milling continued to make good progress.

Tropical oils: In line with our expectations.

  • The segment reported a 15% y-o-y increase in pre-tax profit, boosted by the strong manufacturing and merchandising businesses on the back of higher sales volume. However, this was partially offset by lower CPO prices and production yields, which reduced contribution from the plantation business.

Sugar: Back to the red.

  • The segment reported pre-tax loss of US$69m in 2Q19, mainly due to the consolidation of Shreee Renuka Sugards where the company also registered a loss in 2Q19.

Interim dividend.

Briefing likely to see focus on YKA listing timeline and valuation.

  • Wilmar also provided information in relation to Yihai Kerry Arawana Holdings (YKA) and a briefing is likely to see more questions with regard to the listing timeline.
  • On 12 Jul 19, China Securities Regulatory Commission (CSRC) accepted YKA application to list on the Shenzhen Stock Exchange. The listing date is pending the approval of CSRS, which may take another 2-4 months, but still on track for a 4Q19 listing.


Maintain earnings forecasts.

  • We maintain our net profit forecasts of US$1.24b, US$1.43b and US$1.51b for 2019-21 respectively.


Maintain BUY and target price of S$4.50.

  • Our target price reflects a blended 23x 2019F PE for China operation (assuming 60% of 2019F net profit is from China) and blended 11x PE for non-China operations.
  • We ascribe 26x 1-year forward PE to kitchen food, in line with the average forward PE for Shenzen CSI Consumer Staple Food Index and 12x 1-year forward PE for feeds & oleochemical.
  • For non-China operations, we apply 12x 1-year forward PE for tropical oil, 10x for sugar and 8x for others.


Listing of YKA.

  • Potentially, YKA’s IPO pricing will be pegged at 23x 2018 PE (or estimated 18x 2019F PE). With its strong market positioning and branding in China, we do expect a strong share price performance upon listing. This could lift the trading sentiment on Wilmar as well.

Special dividend.

  • Post listing of YKA, we do expect Wilmar to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-14
SGX Stock Analyst Report BUY MAINTAIN BUY 4.500 SAME 4.500