Wilmar International - UOB Kay Hian 2020-03-30: Not Spared From COVID-19 Outbreak, But Business Is Relatively More Stable

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WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Not Spared From COVID-19 Outbreak, But Business Is Relatively More Stable

• Being in the consumer staple industry, Wilmar (SGX:F34)’s business operation is relatively more stable despite some negative impact on sales and operating costs.
• We adjust earnings down further to incorporate weaker demand for tropical oil segment in view of the drop in crude oil prices and demand disruption at major consuming markets such as India and Europe.
• No change to the listing of its China operations, which is expected to receive approval by mid-20.
• Maintain BUY. Target price: S$4.00.

WHAT’S NEW

Wilmar’s operations are still doing relatively okay amid the global uncertainty caused by the COVID-19 outbreak and slump in crude oil price.

• This is the key takeaway message from our recent conference call with management team. As Wilmar’s operations are mainly focused in consumer staple, ie cooking oil, rice and flour, hence demand is more resilient.
• In fact, during the lockdown in China, the demand for its consumer packs actually rose, with more families cooking at home.

China operations are back to normal and demand is returning.

• Wilmar’s processing factories and the construction of its new projects in China are back in operation. Demand for bulk products is returning, except for cooking oil, of which management is expecting demand to only reach 75-80% of 2019’s level. Demand for its consumer pack has been good. The weaker demand for bulk cooking oil will not pose significant earnings risk as the sales of rice and flour for this segment has been growing faster than cooking oil.
• Better margins from consumer pack also will compensate for the loss of sales in bulk cooking oil. However, we had already adjusted down our earnings estimate from this division in our note dated 24 Feb 20 (Wilmar International - UOB Kay Hian 2020-02-24: Favourable Outlook) to take into consideration:
  1. the higher operating cost as transportation system was affected, and
  2. lower utilisation.

Tropical oil division may see lower sales volume and cost.

• We are adjusting down our PBT from this division by 12% for 2020 to take into consideration lower sales volume and higher operating cost. Economic uncertainty and currency depreciation in major emerging countries are expected to reduce the demand for palm oil while operating cost has increased lately due to logistics disruption, lower utilisation rate and also additional costs incurred for COVID-19 precaution measures.
• Wilmar is the world’s largest palm oil-based biodiesel producer (estimated to have contributed ~3-4% of 2019 PBT). However, the bulk of its production caters to Indonesia biodiesel 30% mandate (B30), which is still on track at this point of time.

STOCK IMPACT

YKA listing still ongoing.

• Yihai Kerry Arawana’s (YKA) listing is still in progress, and is expected to receive the authority’s approval by mid-20. This listing valuation will be based on 2019 financial performance, with the 2019 account having been audited and ready for submission. Its China business accounted for about 60% of the group’s PBT in 2019 (PBT: US$1.74b) vs 57.2% of 2018 (PBT: US$1.57b), which means that earnings should be higher for 2019 vs 2018.
• Given its strong market positioning in China consumer staple market and only 10% of total shares being up for offer during this IPO, we are not concerned on the take-up rate.

Indonesia biodiesel.

• Management did not share our concerns on the potential hiccup in Indonesia’s 30% biodiesel blending (B30) mandate. This is because B30 needs to be fulfilled in order to support palm oil price, as palm oil industry is an important economy sector to Indonesia in terms of GDP contribution and employment.
• Although the CPO Fund may not have enough funding to support 9.3m kl, the industry players and government are exploring other means of funding. Based on our channel checks, for Jan-Mar 20, the B30 commitment is still on track and most of the biodiesel mandated orders have take-up rates of > 90% so far.

EARNINGS REVISION/RISK

• We reduce our 2020/21/22 core net profit forecasts by 12.5%, 1.9% and 6.9% respectively to factor in lower sales volume and PBT margin from tropical oil division.
• In our note dated 24 Feb 20 (Wilmar International - UOB Kay Hian 2020-02-24: Favourable Outlook), we had trimmed 2020 core net profit down by 6% after factoring in lower sales volume and PBT margin from oilseeds & grains amid the COVID-19 outbreak in China. There could be earnings downside risk if the COVID-19 outbreak is prolonged into 2H20, which could further defer consumer spending.
• We now expect core net profit to decline by 12.5% y-o-y in 2020. Our revised core net profit is now 10% below consensus, and we do expect consensus to eventually revise down earnings.

Move to semi-annual reporting.

• Wilmar is moving to semi-annual reporting of financial results with effect from FYE 2020. The company will be providing an executive summary of key financial information as well as a business commentary and outlook for the first and third quarter’s performance.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower target price of S$4.00 (previously S$4.60) post earnings adjustment.
• Our target price is based on 2020F EPS and reflects a blended 23x 2020F PE for China operations and blended 11x PE for non-China operations.
• See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.

Final dividend of S$0.095 is payable on 15 May 20, which translates into a dividend yield of 2.96%.

• Despite lower earnings for 2020, we reckon that Wilmar may maintain its absolute dividend of S$0.125/share (or payout of 49%). This is excluding the potential special dividend from the listing of YKA.

SHARE PRICE CATALYST

Stronger earnings.

• With 22% share price adjustment, we reckon market is factoring in a more significant impact from the COVID-19 pandemic and crude oil price on Wilmarr’s earnings.
• A strong earnings recovery in 2H20 earnings recovery would be a strong share price catalyst. This potential upside could come from the sudden surge of sales volume once the COVID-19 outbreak comes under better control.

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 PE multiple increase for YKA’s food products will add S$0.20 to our target price.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2020-03-30

SGX Stock Analyst Report BUY MAINTAIN BUY 4.00 DOWN 4.600