Wilmar International - Maybank Kim Eng 2019-08-14: Hog-sided


Wilmar International - Hog-sided

African Swine Flu continues to disrupt. Downgrade to HOLD

  • Wilmar International (SGX:F34)’s 1H19 earnings were a major miss against MKE/Street. Improvements in soybean crush margins in 1Q19 were unable to be sustained as demand destruction from the African Swine Flu (ASF) epidemic in China continued to bite.
  • Visibility of a full recovery from ASF in China remains unclear creating downside risks. Of course a 4Q19 listing of Wilmar’s China business in the Mainland where peer valuations are nearly 60% higher should provide near-term downside support.
  • Our forecast changes have resulted in an 8% cut to our Target Price to SGD3.89.
  • The stock is now fairly valued on our revised Target Price after rising 30% YTD; Hence, we downgrade to HOLD.

ASF worse than expected

  • Oilseeds & Grains segment PBT/MT fell 80% y-o-y and 35% q-o-q erasing signs of the recovery displayed in 1Q19. Management claims that margins should improve in 2H19. Yet a full recovery from ASF will potentially take years, creating significant medium term margin visibility challenges, in our view.
  • On the other hand, Tropical Oils saw a PBT/MT rise 5% y-o-y, while volumes increased 10% y-o-y. This is likely driven by increased palm oil demand in China, as well as higher bio-diesel mandates in Indonesia. We expect these drivers to continue to support growth and also contribute to partially offsetting weakness in Oilseeds & Sugar.

Potential China listing provides downside support

  • According to management, the China listing should be concluded before end-2019. At the Chinese regulatory maximum IPO valuation of 23x 12- month historical earnings, we estimate Wilmar could raise USD1.5bn.
  • Management claims they will pay a special dividend to ParentCo shareholders once the IPO is concluded through capex savings. A 50% saving in 2020E capex by the ParentCo could potentially result in a SGD0.16 special DPS (for a 4% incremental dividend yield), we estimate. See report: Wilmar International - Value Discovery.

Lower Target Price to SGD3.89. Downgrade to HOLD

  • Our changes to margin expectations have us lowering 2019E-2021E earnings by 6-13%.
  • Our blended DCF target price (WACC 5.3%, 1% terminal growth) and global peer PE (lowered to 17.4x 2020 target PE from 17.5x to reflect latest prices) has been reduced by 8% to SGD3.89.
  • With 4% downside, downgrade to HOLD.

Thilan Wickramasinghe Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-08-14
SGX Stock Analyst Report HOLD DOWNGRADE BUY 3.89 DOWN 4.210