Wilmar International - UOB Kay Hian 2020-02-21: 2019 Better Than Expected

WILMAR INTERNATIONAL LIMITED (SGX:F34) | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - 2019 Better Than Expected

  • Wilmar’s 2019 core net profit came in above our expectation where tropical oils earnings were better than expected and the segment achieved its highest PBT margin at 5.4% since 2014.
  • With Wilmar’s exposure mainly related to consumer staples, we reckon there might be a delay in spending or switch of demand from bulk to consumer packs during the coronavirus outbreak which management does not expect major impact on its businesses.
  • Maintain BUY. Target price: S$4.75.



WILMAR 4Q19 RESULTS


Results above expectations.

  • Wilmar International (SGX:F34) reported 4Q19 core net profit of US$410m (-2% q-o-q, +23% y-o-y), above our expectations. The core net profit for 2019 is at US$1,256m, above our full-year assumption by 4%; tropical oils earnings were above our expectation on the back of higher margins and sales volume. The tropical oil segment had achieved the highest PBT margin at 5.4% since 2014.

Final dividend of 9.5 S cents.

  • Wilmar had proposed a final dividend of 9.5 S cents per share, bringing the total dividend for 2019 to 12.5 S cents (vs 2018: 10.5 S cents). This represents the highest cash dividend declared by Wilmar since listing with the dividend payout at 43% and dividend yield of 3.1%.

Tropical oils: Above our expectations.

  • The segment’s PBT rose 49% q-o-q and >100% y-o-y in 4Q19, boosted by a strong performance from merchandising activities and downstream processing margins despite regular sales volume.
  • The strong earnings were further aided by higher contribution from the plantation business supported by higher palm oil prices in 4Q19 despite lower production as the production yield was impacted due to the recent replanting activities and unfavourable weather conditions.

Oilseed and grains.

  • The oilseed and grains earnings had dropped by 39% q-o-q in 4Q19, below our expectation as the overall sale volumes had decreased by 7% q-o-q. However, 2019 performance was relatively good amid weak animal feed demand due to the African Swine Fever outbreak.
  • Wilmar’s total manufacturing sales volume for this segment was only down marginally by 2.5% y-o-y for 2019, also an indication that Wilmar is not highly dependent on soybean crushing now.

Sugar.

  • The sugar segment had shown weak earnings in 4Q19 where sales volume in their milling operations had dropped by 33% and 20% y-o-y in 4Q19 despite better performance from their merchandising and processing operations.


STOCK IMPACT


Impact from COVID-19.

  • With the coronavirus outbreak in China, Wilmar had shut down 9 of theirs plants which are located in Wuhan during Chinese New Year. Wilmar has more than 350 plants in 65 locations in China, where most of the factories are back in operation for now.
  • The fear of COVID-19 has affected the operations of hotels, restaurants and cafés (HORECA) which may lead to lower sales volume for the bulk segment for 1H20; this will somehow be mitigated by higher sales for consumer packs (which command higher margins).
  • In the results statement, management highlighted that they do not expect a major impact to its businesses, nevertheless, a prolonged outbreak may have a greater impact. We conducted an earnings sensitivity study based on two scenarios:
    1. lower oilseeds & grains manufacturing sales volume, and
    2. lower PBT margins from oilseeds & grains (refer to side bar).

YKA listing behind schedule but not a concern.

  • Yihai Kerry Arawana’s (YKA) listing process is behind schedule but this is not a concern as the company continued to deliver a good set of results.
  • For 1H19, YKA reported a net profit of Rmb1,597m (or ~US$230m) or 53.9% of Wilmar’s 1H19 core net profit (vs 2018 was 59.2%).
  • Strong 2H19 performances from China operations could put YKA’s earnings on par or just marginally lower vs 2018 levels.


EARNINGS REVISION/RISK

  • No change to our earnings estimates. We forecast core net profits of US$1,348m and US$1,443m for 2020-21 respectively.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST


Share price re-rating from listing of YKA.

  • With its strong market positioning and branding in China, we expect YKA’s share price to perform well upon listing. This could lift trading sentiment on Wilmar as well. Post listing of YKA, we 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.
  • Our current SOTP valuation is based on 2020 earnings. Every 2x se (eg from 26x to 28x) in PE for YKA’s food products will add S$0.20 to our SOTP target price.





Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-21
SGX Stock Analyst Report BUY MAINTAIN BUY 4.75 UP 4.600



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