Wilmar International - RHB Invest 2020-05-13: Higher Valuation For China Listing; Keep BUY


Wilmar International - Higher Valuation For China Listing; Keep BUY

  • Reiterate BUY, new SGD4.83 Target Price from SGD4.30, 26% upside with c.3% FY20F yield.
  • Wilmar International’s 1Q20 results exceeded our estimates, with core earnings growing 23% y-o-y to USD307m (26% of FY20F earnings). Stronger demand for downstream products amidst the COVID-19 pandemic more than offset the decline in the hotel, restaurant and catering (HoReCa), food processing, and upstream businesses in 1Q20.
  • Its 2Q20 outlook remains optimistic, while the removal of the valuation cap for its China IPO is also a positive for the proposed listing.

Diversified businesses saved the day.

  • Wilmar International (SGX:F34)'s 1Q20 core net profit surged 23% y-o-y.
  • Against the backdrop of lockdowns being imposed in cities in 1Q20, Wilmar International recorded a 35% y-o-y jump in its consumer product sales volumes. The elevated demand and higher-margin nature of these branded consumer packs more than offset the 20% y-o-y volume drop in its medium/bulk pack business, which mainly serves the HoReCa and food processing industries.
  • Tropical oil downstream operations also remained healthy, as CPO prices tapered down while oilseed and grain sales volumes improved on the African Swine Fever (ASF) recovery in China.

Management still optimistic on 2Q20.

  • Wilmar's management said consumer product sales have remained strong in 2Q20, and the HoReCa business has started to improve with the easing restrictions in China. Demand for feed should improve over the next two years, as China continues to build its inventory of swine after the ASF recovery.
  • Meanwhile, the subdued soybean prices should support crush margins. The palm plantation and sugar milling businesses are affected by lower prices, but these should be offset by improving margins in downstream refining – which management expects to remain sturdy. We believe all these factors point to a positive outlook for 2Q20, and lift FY20-22F earnings by 5/3/4%.

Good news on China IPO brings more upside.

  • China will pilot its reforms on Shenzhen’s Chinext startup board. Under the new rules, the IPO price will be decided by the market, and not bound by any IPO valuation cap. The IPO process will also be hastened. This new regime is expected to be implemented sometime this year.
  • Wilmar's management said that listed peers on the Shenzhen Stock Exchange are now trading at an average of 40x P/E. As such, Wilmar is aiming for a P/E of 23-40x on the listing of its China subsidiary, Yihai Kerry, and expects the IPO to happen by the year’s end.

Target Price rises to SGD4.83, Wilmar is one of our country Top Picks.

Juliana Cai RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 4.83 UP 4.300