Wilmar International - CGS-CIMB Research 2020-02-24: Why We Are More Positive Post Briefing


Wilmar International - Why We Are More Positive Post Briefing

  • Wilmar International (SGX:F34) is on track to list YKA in China and its operations in China have so far not been significantly affected by the Covid-19 outbreak.
  • The group appears optimistic it can deliver better earnings in FY20 from higher commodity prices, which is better than our expectation (-11% y-o-y).
  • Maintain ADD and SOP-based Target Price of S$4.58 as the market has yet to fully price in YKA's listing value and potential special dividend post its listing.

Three reasons why we are more positive post the results briefing

  • We are more positive on Wilmar International post its results briefing for the following reasons:
    1. The impact of Covid-19 on its China operations has been minimal so far due to its large-scale integrated operations. Stronger demand from consumer products, which fetch higher profit margins, will help offset weaker demand from restaurants.
    2. YKA’s listing will likely be delayed to 3Q from the earlier-expected 1Q 2020. However, this could be a blessing in disguise as this means YKA will be using its FY19 recurring net profit (+6% y-o-y) to determine IPO pricing.
    3. The group appears confident it can deliver better results in FY20, driven by higher CPO and sugar prices and timely purchases of raw materials.

#1 – Minimal impact from Covid-19 on China operations so far

  • Wilmar International said the Covid-19 outbreak has not significantly affected its China operations. The group saw stronger demand for its consumer products, although this was partly offset by lower bulk sales of staple food to hotel, restaurant and catering sector.
  • It expects soymeal demand to be weaker as the epidemic is likely to cut demand for meat given that consumers are eating out less for fear of contracting the virus.

#2 – Better IPO pricing for YKA?

  • Wilmar International revealed that the listing of YKA on ChiNext (Shenzhen Stock Exchange) could be delayed to 3Q20 from the original target of 1Q20 due to Covid-19. As such, it will most likely be using YKA’s FY19 recurring earnings, which is 6% higher than FY18’s, to price its IPO.
  • On top of this, the IPO pricing may no longer be capped at max 23x historical P/E but could instead be based on investor demand and reach as high as 30x, if based on sector P/E. If its China IPO (which makes up more than 60% of Wilmar’s FY19 earnings) can fetch a higher valuation, it will have a positive impact on Wilmar's share price, which is trading at only 16x P/E.
  • Wilmar International's shareholders could also benefit from a potential special dividend (we estimate S$0.03 to S$ 0.09 per share) post listing.

#3 – Optimistic on 2020 earnings prospects

  • Wilmar International appears optimistic it can deliver better earnings in 2020, driven by higher sugar and palm oil prices, timely purchases of raw materials and expansion of its consumer products business.
  • The group also indicated that the higher dividend payout of 45% in FY19 (vs. dividend payout of 42% for FY18) is sustainable, partly because YKA will be able to finance its operations independently post its listing. As such, there is potential upside to our FY20F earnings forecast, which appears conservative as we have assumed an 11% y-o-y decline in earnings.
  • See attached PDF report for further details.
  • See also Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-24
SGX Stock Analyst Report ADD MAINTAIN ADD 4.580 SAME 4.580