Wilmar International - DBS Research 2020-03-27: Navigating Through Rough Seas

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Navigating Through Rough Seas

Market rules out China listing at current Wilmar's share price.
Earnings volatility priced in; PE de-rated back to ‘upstream palm oil’ multiple, albeit expansion to consumer branded products.
Key downside risk: COVID-19 beyond 2020, heightened global recession.

We believe Wilmar International (SGX:F34) is attractively valued, providing ample margin of safety. Market rules out catalysts such as potential earnings growth and its China listing due to current market volatility. This leaves a possible pro longed pandemic beyond 2020 and heightened global recession as the only major potential risk.

Although the Yihai Kerry Arawana (YKA) listing is still on track for 3Q20, the market has already ruled this out as a potential catalyst this year with Wilmar’s current PE multiple of 12x-13x .
We believe that any possible listing delays have been baked into Wilmar's share price. Its share price level is not reflective of Wilmar’s true presence in China. The market pegged valuation to ‘black-box’ commodities linked multiples back in 2017, before the China operation listing was announced.
We believe that the market has ignored Wilmar’s presence in China as a leading player in some food segments such as flour and consumer pack edible oils. These are staple food and less sensitive to discretionary spending amid the COVID-19 pandemic. Wilmar proved its resilience during the escalating US-China trade war in 2017 which led to volatility of soybean prices, as well as the African Swine Fever (ASF) when earnings rebounded in 2H19.
Wilmar could capitalize on improvements in China and firmer recovery of economic activities. The closure of over 16 temporary hospitals for COVID-19 in Wuhan is a good sign of recovery.

Furthermore, we believe that Wilmar's share price correction reflects the broader sell-off of commodities-linked stocks. The market remains cautious of Wilmar’s exposure to the volatility of commodity prices and market, as reflected on the current below average PE multiple (-1 standard deviation of its five years PE).
However, on the other hand, Wilmar’s continuous initiatives to venture into branded products and leverage on its size and presence across Asia and Africa to mitigate volatile commodity prices. This should result in a more stable and steady earnings profile going forward. The listing of YKA will raise visibility for the group’s strong presence in consumer branded goods.

We lowered our FY20/21 earnings forecast by 12%/13% on lower China GDP growth assumption in 2020 at 4.9%, and lower oilseeds crushing margin assumption amid current commodities price volatility on COVID-19 until 2021. Our US$1.1bn earnings forecast (-12 y-o-y) is premised on Wilmar still profiting from volatile commodities market as seen in 2017- 2019 with the US-China trade war and ASF.
Our new earnings forecast results in lower SOTP based target price to S$4.00, which implies FY20 PE of 16.3x. The target PE multiple is at +1 standard deviation of its five years average PE. We believe Wilmar deserves a valuation re-rating closer to consumer companies PE multiple, driven by higher contribution on consumer branded goods in the sales mix which accounted for around 60% of Wilmar’s earnings in 2020.
Its share price valuation reflects its earnings volatility. We estimate that the market has discounted an earnings drop of 30% y-o-y in 2020 due to the COVID-19 pandemic and unexpected commodity price swings.
See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.

A prolonged COVID-19 pandemic beyond 2020 may trigger a global recession, which has not been fully priced in yet. However, concerted efforts by governments worldwide with stimulus to fight against COVID-19’s negative effect may minimize the risk of a free-fall.
In the case of a global recession, Wilmar could test S$2.00-2.50 per share level which implies trough valuation of 8.0x-10.0x FY20 PE , at GFC 2008 PE multiple. However, we believe the de-rating scenario is unlikely.
Wilmar has transformed from a commodity giant to an integrated consumer player backed by its full range of packaged and branded consumer goods which accounted for more than half of Wilmar’s earnings currently. This compares favourably vs 2008 as the consumer branded goods only accounted for 4% of its consolidated profit before tax.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2020-03-27

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