Wilmar International - DBS Research 2020-05-12: Consumer Products Leading The Way


Wilmar International - Consumer Products Leading The Way

  • Wilmar International's 1Q20 core earnings beat our expectation, in line with consensus.
  • China’s consumer products and tropical oil downstream segment led the performance.
  • Listing of China operations expected to obtain approval in 2H20.
  • Maintain BUY with Target Price of S$4.00 (unchanged).

Wilmar 1Q20 core earnings ahead of our estimate – in line with consensus.

  • Wilmar International (SGX:F34)’s reported core earnings reached US$306m (+22.5% y-o-y, -25% q-o-q ahead our estimate, in line with consensus). The strong 1Q20 performance was driven by consumer products, especially in China, and downstream segment on tropical oils division, albeit the Hotel/Restaurant/Catering (HORECA) business was negatively affected by lockdown in its major markets.
  • We are keeping our core earnings forecast for now at US$1bn in 2020 (-12.3% y-o-y) and we believe Wilmar International can achieve our forecast as management shared a constructive tone for 2Q20 earnings during the briefing.

Good performance despite the virus

1Q20 : Core earnings ahead our expectations

  • Wilmar International's 1Q20 core net profit was up +23% y-o-y/-25% q-o-q to US$306.5m on strong consumer products performance (especially in China) and tropical oils downstream operations, albeit it was partially offset by lower demand from Hotels/Restaurant/Catering (HORECA) business due to COVID-19 lockdowns. The core earnings was ahead of our estimate mainly on better than expected margin performance, but in line with consensus despite reported net profit down 13% y-o-y to US$224.3m, driven by the mark-to-market losses on investments in equity securities amid the overall weak equity markets.
  • Revenue reached US$10.9bn (+4.6% y-o-y, -3% q-o-q), largely on track to our and consensus estimates. Wilmar International made changes on its segmental reporting, which is positive in our view as the breakdown shows its strength on consumer products, but we are unable to measure its performance on a q-o-q basis due to different disclosures.
  • Wilmar International now combines food products from all its other segments (i.e. tropical oils, oil seeds, sugar) into a single segment called Food Products. Wilmar International has also combined industrial products from its other segments (such as animal feed, gas oil, biodiesel) into a segment called Feed and Industrial Products. Oil palm plantation and sugar milling activities are now classified under Plantation and Sugar Milling with the Others segment remaining largely unchanged.

Food products – Consumer products grew well on lower input cost.

  • Low palm oil price bodes well for Wilmar International’s downstream operations, and lower price q-o-q in 2Q20 likely to keep its downstream tropical oil segment strong as it has been since 2019.
  • Consumer products sales volumes grew 35% y-o-y to 2.86m MT as demand for rice, flour and cooking oil rose. Medium pack and bulk sales volumes declined 20% y-o-y to 3.32m MT. COVID-19 restrictions caused people to dine out less, reducing demand from HORECA.

Feed and industrial products - Crush & refining margin improvement mitigated weaker tropical oil volume.

  • Tropical oils sales volumes declined 10% y-o-y to 5.24m MT led by a slowdown in certain destination markets. Sales volumes of Oilseeds and Grains rose 17% y-o-y to 4.28m MT as crush margins and volume improved following a recovery from the African Swine Fever (ASF).
  • Sugar sales volumes inched down 3.0% y-o-y to 2.08m MT. Refining division performed well as pricing premium for white sugar improved although milling will be impacted by lower sugar prices.

Earnings forecast: Positive tone on the cards, but maintaining our forecast for now

  • We maintain our forecast for now – we expect earnings to be US$1bn each in FY20F (-12.3% y-o-y) and FY21. We believe Wilmar International can beat our earnings forecast, as management shared a constructive one for 2Q20 performance.
  • Wilmar International’s management has highlighted that 2Q20 performance will remain strong as Wilmar International is producer of essential products, both food and non-food, which should recover alongside economic activity. HORECA business should also start to recover in the same quarter, while the normalising hogs population post ASF in 2019 would drive stronger feed demand. Crushing margin also likely to remain strong in 2Q20.

Rating and Target Price

  • We believe the changing of segment reporting will reveal Wilmar International’s strength and presence in China and other regions especially consumer branded goods, which was historically hidden away in the oilseeds and grains, and tropical oil segment.
  • The next step is earnings delivery – if Wilmar International can alleviate market concerns over its earnings performance due to the current commodity price volatility, we believe Wilmar's share price can further re-rate to outperform the commodity price trend ahead. Wilmar International has so far demonstrated that its earnings performance is detached from the commodity price volatility, trade spat, ASF and 1Q20 lockdown in China.
  • We maintain our Sum of Parts (SOTP) valuation of S$4.00, which implies FY20 PE of 16.7x. The target PE multiple is at +1 standard deviation of its five-year average PE. We believe Wilmar International’s valuation deserves to re-rate closer to consumer companies’ PE multiples, due to higher contribution from consumer branded goods in its sales mix – this accounted for around 60% of Wilmar International’s earnings in 2020. Our SOTP-valuation is still based on the older reporting segment breakdown, and we may change it as soon as we gather more information on each new segment, probably when 2Q20 earnings are released at the earliest.
  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
  • The listing of its China operations is still on track and expected to obtain approval in 2H20. We still assume that YKA will be listed at 19.0x FY20 PE, which we believe is reasonable, since its only slightly higher than our Wilmar International’s target PE multiple of 16.7x.

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-05-12
SGX Stock Analyst Report BUY MAINTAIN BUY 4.000 SAME 4.000