Wilmar International - UOB Kay Hian 2020-05-12: 1Q20 Results Above Expectations

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - 1Q20 Results Above Expectations

Wilmar’s 1Q20 core net profit came in above our expectation on the back of strong performances from the consumer products and oilseeds & grains segments. As expected, Wilmar reported mark-to-market losses for its investment in securities and lower medium pack and bulk sales volumes due to lower demand from HORECA.
Management guided that if China’s economy recovers as expected, 2Q20 operations will not be significantly impacted.

Wilmar International (SGX:F34) reported 1Q20 core net profit of US$307m (-25.2% q-o-q, +22.5% y-o-y), above our expectation. 1Q20 net profit of US$257m was lower y-o-y and q-o-q on mark-to-market losses on investments in securities. This did not come as a surprise to us as we had highlighted this in our results preview note (please take note of the change in segmental reporting effective 1Q20).

Reported sales volume was up strongly by 34.8% y-o-y, driven mainly by consumer staples such as rice, flour and cooking oils. In addition, the recovery of soybean crushing volume and margins came in earlier and stronger than we had expected. We were expecting only a mild recovery in 1Q20, followed by a strong performance in 2Q. Wilmar may have taken more market share in the soybean crushing market with peers facing a shortage in soybean supply in 1Q20 due to late soybean arrivals.
The strong performances from these two segments had mitigated the impact from lower demand from the hotel, restaurant and catering (HORECA) businesses which are not allowed to operate amid the lockdown restrictions. Sales to HORECA and food processing businesses are captured under the medium pack and bulk products segment which saw sales volume drop 20% y-o-y.

2019 was a fantastic year for the segment, given the sharper decline in raw material prices against the processed products. Low palm oil prices may affect upstream operations which provide for insignificant contribution to Wilmar’s earnings.
While the low raw materials prices would continue to provide for good margins in the downstream operations, margins may not be as good as that in 2019.
Sugar refining operations should perform well in the coming quarters due to the improvement in the premium for white sugar over raw sugar. This will help offset the potential weakness from sugar milling which will be impacted by the lower sugar prices.

We expect the improvement in the oilseeds and grains segment to be sustainable with the gradual recovery in swine supply in China.

With the easing of lockdown measures, especially in China, demand from HORECA businesses are expected to recover in 2Q20.
We had also observed that restaurant sales had improved ever since China begun to ease the lockdown restrictions. Having said that, consumer pack sales will remain strong with people continuing to stock up on necessities.

Wilmar adopted a new segment classification to better reflect the group’s core businesses and strategy.
Maintain BUY and target price of S$4.00, based on 2020F EPS and reflects a blended 23x 2020F PE for China operations and blended 11x PE for non-China operations.
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A stronger recovery in 2H20 earnings could be seen with potential upside coming from the sudden surge in sales volumes as China relaxes its movement restrictions. Recent newsflow from China revealed that sales of cooking oil, rice and flour are strong, and this could translate into much better sales volume than expected.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-12

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