Wilmar International - DBS Research 2019-12-09: Bigger, Stronger In 2020


Wilmar International - Bigger, Stronger In 2020

  • Higher edible oil price outlook has minimal impact on Wilmar International’s earnings.
  • Special dividend and YKA listing are catalysts.
  • Imputed higher multiple for tropical oil business.
  • Maintain BUY with a higher Target Price of S$4.60.

Steady performance in 2020.

  • We made minimal changes to our earnings forecast but raised the valuation multiple for the tropical oils business. WILMAR INTERNATIONAL (SGX:F34)’s business model works on the assumption that trading margin management and market share expansion are more crucial factors on earnings performance rather than commodity prices.
  • We derived a higher target price for Wilmar International as we attached a higher multiple of 15.5x FY20 PE for its tropical oil business from 12.5x previously, due to better palm oil price outlook.

Where we differ: Wilmar’s potential is far greater than market expectations.

  • As we gather more information on Wilmar International’s China operations, we are increasingly convinced that Wilmar International’s potential is far greater than market expectations. As the market leader in each segment, Wilmar International’s presence makes it difficult for competitors to operate meaningfully in each region. This gives Wilmar International a solid footing to further grow its market share and earnings.
  • Wilmar International is also heading towards a more stable business model and earnings profile with higher contribution from consumer branded products.

Catalyst from listing of China operations.

  • Potential IPO (A-share listing) of its China operations in 1Q20 at a higher PE multiple vs Wilmar International’s existing PE multiple of 14.0x-15.0x could be a further share price catalyst.

Target Price and rating: Maintain BUY with higher Target Price of S$4.6

  • We maintain our BUY rating for Wilmar International, and we believe the market is discounting its China operations and expansion into consumer branded products. YKA listing in 1Q20 and potential special dividend following the listing will be a short-term catalyst in 2020.
  • We derived our higher target price of S$4.60 as we assumed a higher multiple of 15.5x for its tropical oil business in 2020. We believe our multiple assumption is fair given that we expect palm oil prices to recover by 19% y-o-y which would lift the value of palm oil related business. We believe Wilmar International’s integrated upstream-downstream business model in this segment will allow the company to deliver a steady earnings performance during various edible oil price cycles. See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports.
  • Meanwhile we are keeping our multiple for the rest of the other divisions unchanged for now – we assume 18x PE for its oilseeds and grains business which is fair, in our view, as it has the largest crushing capacity in the industry and is the market leader in the consumer branded products segment.
  • We are also keeping our 11.0x PE multiple assumption for the sugar business, as supply and demand fundamentals are keeping a cap on sugar prices; segment’s contribution to Wilmar International’s profit before tax remains small.

Earnings revision: Neutral impact on higher edible oil assumption

  • We are keeping our forecast unchanged as we believe commodity prices have a minimal impact on Wilmar International’s earnings since Wilmar International’s profitability also depends on management execution on the trading activities such as timing of feedstock purchases.
  • We expect earnings to rebound by 13% y-o-y to US$1.2bn in 2020, as we expect 1H20’s performance to recover from the low in 2019. 1H19’s earnings were affected by the African Swine Flu and US-China trade war.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-12-09
SGX Stock Analyst Report BUY MAINTAIN BUY 4.60 UP 4.350