Wilmar International - UOB Kay Hian 2020-05-13: Sustainable Performance Expected In 2Q20


Wilmar International - Sustainable Performance Expected In 2Q20

  • Wilmar International (SGX:F34)'s 1Q20 strong performance is expected to sustain into 2Q20, especially with support from the food products segment. Consumer pack sales are expected to record strong double-digit growth with better margins and customer stickiness, thanks to good product quality. Medium pack and bulk sales volumes are also recovering, especially for rice and flour.
  • The YKA listing approval is in the final stages and the IPO pricing could be higher than 23x 2019 PE.
  • Maintain BUY. Target price: S$4.00.

Key takeaways from Wilmar International’s briefing:

  • Consumer packs sales: Management guided strong double-digit growth for sales volumes in 2Q20, especially from China. Wilmar International had gained more market share during the lockdown period as its peers were not able to meet supply requirements, and also thanks to its strong and wide distribution network in China. Margins are also expected to improve from late-2Q20 onwards on the back of the sharp decline in raw material prices while selling prices for consumer packs remain steady. Management is also confident about retaining its new group of retail customers thanks to its good product quality.
  • Medium packs and bulk: Sales volumes for the COVID medium packs and bulk segment are recovering, but are still not back to pre-COVID 19 levels, mainly due to the slower uptake of cooking oils. Having said that, the sales volumes for rice and flour have increased significantly, and are back to pre-COVID 19 levels.
  • Oilseeds & grains: Management is expecting soybean meal demand and crushing volume to increase in 2020 on the back of the easing in the African Swine Flu outbreak in China and with the increasing supply of swine. Soybean crushing utilisation rate in 1Q20 had been quite high at about 80% and this is expected to be sustained with the better crushing margins as well.
  • Sugar: The sugar processing segment did well in 1Q20 with the increase in white sugar’s premium. However, this was partially offset by weakness in sugar milling which was impacted by the lower sugar prices.
  • Tropical oils: For 1H20, this segment may not do as well as it did in 2H19. However, the low raw material prices would provide for better downstream margins and hence offset the potential weakness in upstream operations (which is relatively very small). Overall, this segment is still expected to be profitable but with lower margins. This is in line with our expectation.

Wilmar's 2Q20 outlook remains positive.

  • Wilmar International's 2Q20 is likely to sustain the good performance in 1Q20 on:
    • strong performance from food products in both the consumer packs and bulk segments,
    • higher soybean meal demand and better crushing margins; and
    • sugar should provide for better contribution with the better premium of white sugar.

China – The biggest contributor.

  • China is the greatest contributor to Wilmar International’s earnings, where it contributed about 70% of Wilmar International’s 1Q20 profit. For the consumer packs segment, China is the largest contributor with an 80% contribution to sales volumes.

No concerns on India’s ban for refineries.

  • The Indian government had announced the suspension of certain refined palm oil import permits to support the domestic refining industry. Having said that, Wilmar International will not be affected as Adani Wilmar Limited, (50:50 JV partner) in India, is the largest refiner and producer of consumer pack edible oil in India.

Approval for YKA listing expected this year.

  • The Yihai Kerry Arawana Holdings (YKA) listing on the Shenzhen Stock Exchange is expected to receive approval for the listing in 2H20. Management mentioned the listing proposal is at the final stages of approval by authorities and once the approval is granted, the listing of YKA should take place within one month. Management also mentioned that the listing price could now be fixed higher than 23x 2019A earnings.

No changes to earnings forecast.

  • Despite the better-than-expected 1Q20 results, we are maintaining our earnings forecast for 2020 at US$1.13b, which is 10% lower y-o-y and 5% below consensus earnings. 2Q20 could have more volatile quarters with more countries having implemented lockdown or movement control measures (such as India and Indonesia) and this could impact operations and earnings. The impact from the lockdowns in India and Indonesia to Wilmar International’s operations may not be as severe as the impact from China’s lockdown as ~70% of its earnings comes from China.
  • Wilmar International adopted a new segment classification for reporting its segment revenue and results. However, no breakdown on revenue and PBT by segment was disclosed in the 1Q20 executive summary. We will pencil in the reclassifications once more information is disclosed in the 1H20 results.

Maintain BUY for Wilmar with a target price of S$4.00.

Wilmar's Share Price Catalyst

  • A stronger recovery in 2H20 earnings might 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 is translate into better-than-expected sales volumes.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 4.000 SAME 4.000