Wilmar International - UOB Kay Hian 2020-06-11: Performance Momentum To Continue With Good Earnings Outlook


Wilmar International - Performance Momentum To Continue With Good Earnings Outlook

  • We have revised up fair value for Wilmar International (SGX:F34) after rolling over valuation to 2021 with an expectation of 14% y-o-y increase in core net profit for 2021. We expect higher core net profit, driven again by China operations supported by steady demand growth for its consumer food products and better animal feed demand.
  • Indicators that we monitor point towards Wilmar International’s earnings remaining resilient in 2Q20, and also indicate a good start for 3Q20 as well.
  • Maintain BUY. Target price: S$4.80.

Increase Wilmar's fair value.

  • Wilmar's share price has increased 5.5% since the announcement of its 1Q20 results and reached our previous fair value of S$4.00. In this report, we have increased our fair value to S$4.80 after rolling over our valuation to 2021 with an expectation of 14% y-o-y growth in its core net profit.
  • We reckon that Wilmar's share price may continue to outperform driven by the upcoming results announcement and the listing of its China subsidiary, Yihai Kerry Arawana (YKA), on ChiNext, Shenzhen Stock Exchange.

2Q20 earnings performance.

  • Usually 2Q is seasonally the weakest quarter for Wilmar International. We currently expect a core net profit of US$240m-260m for 2Q20 (vs 2Q19: US$177m) and we may review this later in July before the results announcement in August.
  • The key areas to watch out for are the sales recovery from bulk products and sustainability of the strong consumer packs sales in China. On top of that, the sugar division could see positive contribution in 1H20 as merchandising & processing segment should see better margins from the widening price spread between raw and white sugar.
  • Also recall that 2Q19 earnings were very weak as the African Swine Fever impacted China soybean meal demand, and Wilmar International also consolidated the losses from Shree Renuka Sugars Limited.

Listing date of YKA is drawing closer and could potentially be > 23x 2019 PE.

  • As mentioned in Wilmar International’s 2019 annual report, the listing of YKA will take place in 2020. Although no fixed timeline has been given, the listing of YKA is drawing closer as we are in the month of June now. It is also a blessing that YKA’s IPO has been delayed from the initial expectation of late-19 since IPO pricing will now not be capped at max 23x historical PE, and we understand that 2019 recurring net profit is ~6% (or approximately Rmb4,468m) higher than 2018 (Rmb4,215m).
  • Assuming a listing value of 2019 PE of 23x-30x for the YKA IPO which values YKA at US$14.6b-19.0b, this would equate to 79-103% of Wilmar International’s current market cap (US$18.5b).
  • Our current fair value values the China operation at 22.5x 2021F PE or 26x 2019 PE. If we increase China PE to 30x 2019, the fair value for Wilmar International would be S$5.30 (or 10.4% higher than S$4.80).

Earnings revision for 2021.

  • We maintain our earnings for 2020 at US$1,132m, or ~11% y-o-y decline, while adjusting 2021 earnings down by 6.5% after fine-tuning our numbers for tropical oils segment. Our numbers are 5-8% lower than consensus. We prefer to stay conservative in our earnings forecast given the uncertainty arising from COVID-19 pandemic.

Potential upside to our earnings.

  • During the post-1Q20 results meeting, Wilmar International stated that it targets to deliver similar or better than 2019 core net profit in 2020. Key earnings drivers will come from the expansion of its consumer products market shares in China and other markets, timely purchase of raw materials, and better sugar merchandising profit.
  • In our view, the main variance to our number is likely to come from the oilseeds & grains division where we remain conservative with an expectation of 8% y-o-y decline in PBT.

Maintain BUY with higher target price

Stronger earnings.

  • A stronger recovery in 2H20 earnings could happen 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 strong, and this could translate into better-than-expected sales volumes.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow UOB Kay Hian | https://research.uobkayhian.com/ 2020-06-11
SGX Stock Analyst Report BUY MAINTAIN BUY 4.80 UP 4.000