Wilmar International - DBS Research 2020-07-01: Shifting To Higher Gear


Wilmar International - Shifting To Higher Gear

  • Yihai Kerry Arawana (YKA) expected to be listed at 22x PE multiple on strong investors interest.
  • Benefiting from diversified food product lines.
  • Wilmar International to disclose more details of its food business in 2Q20.

Yihai Kerry Arawana (YKA)’s updated prospectus: Listing of China operations to reassure investor confidence

  • Wilmar International (SGX:F34)’s latest updated Yihai Kerry Arawana (YKA) prospectus not only disclosed its financial and operational data for the full-year 2019, but also revealed its potential fund raising of RMB13.9bn (S$2.8bn) which is higher than our current estimates of S$1.4-S$1.5bn.
  • We believe the higher fund raising target is backed by the stronger than expected interest among the investors. This is positive for Yihai Kerry Arawana. It needs to raise more funds to strengthen its position in China’s food market, especially in the oilseeds and grains segment. It also needs a bigger war chest to build up its downstream segments such as branded food products.
  • The strong interest in Yihai Kerry Arawana also reaffirms that Wilmar's share price in Singapore is undervalued. Historically, investors still associate Wilmar International with palm oil related businesses despite Wilmar International’s continuous expansion beyond palm oil businesses across China.
  • Other than Yihai Kerry Arawana, Wilmar International’s businesses are already deeply discounted even at current Wilmar's share price. This will be more obvious if Yihai Kerry Arawana is listed at higher than expected multiple, generating a bigger than expected market cap of S$28bn (assuming 10% of new shares, and S$2.8bn fund raised target achieved). This implies that Wilmar International’s current business lines across ASEAN countries and India are fully discounted at its current market cap of around S$26bn.
  • Wilmar International’s other business segments such as sugar may not contribute significantly to its consolidated earnings, but we can’t underestimate its end-to-end upstream to downstream presence in the palm oil business. Wilmar International is set to profit even when palm oil prices fall due to the company’s exposure to the downstream segment. Its downstream palm oil refining facilities in major buying countries such as India enable its tropical oil division to withstand any fluctuation in palm oil prices while delivering relatively good earnings, as evident in 2018-2019.

Earnings forecast: Room for organic growth

  • While we retain our FY20 earnings forecast, there’s upside potential if 2Q20 earnings beat our expectations. In 1Q20, Wilmar International beats our expectations mainly due to steadier than expected food demand amid the COVID-19 lockdown.
  • Going forward, we believe that Wilmar International will sustain its positive earnings momentum and capitalise on the reopening of major economies such as India and China. This will improve demand recovery for non-household food. Maintaining good earnings momentum is crucial to sustain strong interest in its China listing in 2H20 and retain Wilmar International’s potential re-rating story.
  • Looking deeper into its prospectus, the potential for further organic earnings growth is promising, with double-digits gross profit margin for the kitchen food segment. Factory utilisation rate for this segment is likely to be in small to medium packaging goods, which only hit 50% in 2019. This opens up organic growth opportunities, other than inorganic growth China. Yihai Kerry Arawana will beef up its balance sheet via listing and will be better positioned to capture the peak of branded food demand at around Chinese New Year season.

Raised Target Price to S$4.60, maintain BUY

  • We maintain our BUY rating with higher Target Price of S$4.60 premised on Wilmar International delivering good earnings in 2Q20 and Yihai Kerry Arawana’s value unlocked at 22-23x PE multiple. See the sum-of-parts valuation summary for Wilmar International in PDF report attached below. 
  • Wilmar International also deserves the credit for Yihai Kerry Arawana’s listing as it will be self-funded going forward. This may increase free cash flow on Wilmar International’s ex-Yihai Kerry Arawana entities and potentially increase dividend payout for shareholders.
  • Furthermore, commodity prices is not expected to rise sharply in 2021. Hence, an integrated player such as Wilmar International is well positioned to capture margins arising from steady demand from the consumers, with reasonable input cost.

Our higher Target Price is derived from a higher FY20 target PE multiple of 19.6x.

  • The target multiple assumes a higher PE of 22x applied to Yihai Kerry Arawana, which we estimate accounts for 60% of Wilmar International’s group earnings. This is higher than our previous estimate of 18x on Yihai Kerry Arawana earnings. See Yihai Kerry Arawana's listing scenarios vs Wilmar International's target price in PDF report attached below. Using a historical average of 16x on Wilmar International’s non China business ( 40% of its earnings), this will give rise to a blended target PE f 19.6x.
  • The higher PE multiple for China operation is based on our view that Yihai Kerry Arawana IPO will gain strong interest among the investors. We estimate Yihai Kerry Arawana market capitalization at around US$14.3bn/S$19.7bn, based on our 2020 earnings estimates 0f US$650m for its China operations or about 60% (FY19 : 61%) of our FY20 earnings forecast for Wilmar International at US$1.083bn (-13% y-o-y).
  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.

Wilmar International’s share price has performed well in the past few months due to strong 1Q20 results and reaffirmation of its China listing.

  • Wilmar International's current PE multiple is already close to +2 standard deviation (SD). However, historically Wilmar International has traded at around its palm oil peers’ multiples of 13-15x PE. We believe this does not fully reflect the potential of its food business which has withstood uncertainties triggered by the US-China trade war, African Swine Fever (ASF) and COVID-19 pandemic.

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-07-01
SGX Stock Analyst Report BUY MAINTAIN BUY 4.60 UP 4.000