Wilmar International - RHB Invest 2020-02-21: Positive Surprises From Two Core Segments; Delay In China Listing Turns Out Positive


Wilmar International - Positive Surprises From Two Core Segments; Delay In China Listing Turns Out Positive

  • Wilmar International (SGX:F34)'s FY19 results were above expectations.
  • We are more optimistic on Wilmar’s outlook post-analyst briefing on 21 Feb. The delay in the China listing has turned out to be positive for the group as China may soon lift its IPO valuation cap. Its China unit also recorded higher earnings in FY19.
  • Looking ahead, management is also optimistic about the earnings outlook for its three main segments – tropical oils, oilseeds & grains and sugar.

Positive Surprises From Two Core Segments

  • FY19 PATMI of USD1.3bn was 3% above our estimates. Positive earnings surprises from the tropical oils and oilseeds & grains segments in 4Q19 were larger-than-expected. These were partially offset by misses in sugar segment’s earnings and lower contributions from associates.
  • Still, higher-than-expected earnings from core segments resulted in a rise in our target price.

Strong contributions from tropical oils.

  • Pretax earnings for the quarter was up > 100% y-o-y in 4Q19 and +54% for FY19, 24% above our expectations. As mentioned in previous reports, we expect the tropical oils to earn supernormal margins in the short term as its plantation unit continues to benefit from rising CPO prices while its merchandising and downstream activities still delivered solid performance on strong demand and low-cost stocks.
  • We expect Wilmar to still see strong earnings in 1Q20 amidst y-o-y higher CPO prices before tapering off in later quarters on rising input costs for downstream businesses.

Oilseeds & grains also surpassed our expectations significantly.

  • 4Q19 pretax earnings for the segment grew 61% y-o-y although FY19 pretax earnings were down 27% y-o-y due to weak 1H19 results. Crush margins continued to chart improvements in 4Q19 while sales for consumer products also grew 10% due to stronger seasonal sales on the back of an earlier Lunar New Year this year.

The misses.

  • Sugar segment missed our expectations as it swung back to a loss in 4Q19. For the full year, the segment still generate a positive pretax profit of USD2.6m. Share of JV and associates declined 44% y-o-y in 4Q19 and 51% y-o-y for FY19 due to the weaker performances in China, Africa, and Vietnam.
  • Contributions from JV and associates made up c.20% of FY18 earnings, the decline in FY19 therefore offset some of the gains in the tropical oils segment.

Changes in assumptions and Target Price.

  • We raise FY20-21 margins assumption for tropical oils and oilseeds & grain on the back of strong 4Q19 results, but our FY20F-21F earnings remain largely unchanged as they are offset by lower earnings forecasts for JV and associates. The higher earnings assumption for the tropical oils and oilseeds & grains segments raise our SOP-derived Target Price to SGD4.77.

Delays could possibly bring better IPO price.

  • On a recurring basis, Wilmar’s China FY19 earnings is 6.1% higher than FY18. Under the current IPO valuation cap, which is based on historical earnings, Wilmar could receive a better IPO price on the back of higher earnings. In addition, management cited that China may also lift its IPO valuation cap of 23x historical P/E. This means that the valuation would be based on demand, and currently peers are trading at 31-33x P/E.
  • Should the new regulation be confirmed in March, we believe Yihai Kerry could potentially receive better valuation due to its huge market cap and strong brand equity in China. Management now hopes to receive the approval for listing in 3Q20.

Management is positive on FY20F earnings outlook.

  • Management expects the tropical oil segment to perform satisfactorily in FY20F, aided by stronger margins from the plantation unit. We expect the downstream segment to remain strong in 1Q20 on low-cost stock, after which we believe timely purchase of raw materials would be key. The oilseeds & grains segment should perform better due to the low base effect in 2019.
  • The sugar segment underperformed in 4Q19 due to losses from Shree Renuka. Delay in sugar harvesting in India should provide better earnings for the sugar segment in 1Q20. The milling and merchandising activities should also benefit from rising sugar prices in FY20F.

Impact from COVID-19 is not significant at the moment.

  • Management cited that bulk pack volumes sold to restaurants/hotels would decline as Chinese citizens avoid going out during the virus outbreak. However, volume growth on the consumer packs side should help to cover some of the lost sales. Although sales volumes for the consumer packs are smaller, they carry higher margins which should help to offset the loss in bulk pack earnings.
  • Management also mentioned that it has not faced major disruptions in its supply chain so far.
  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-02-21
SGX Stock Analyst Report BUY MAINTAIN BUY 4.77 UP 4.430