Wilmar International - CGS-CIMB Research 2020-08-12: Three Reasons To Stay Positive On Wilmar

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WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Three Reasons To Stay Positive On Wilmar

• We stay positive on Wilmar (SGX:F34) as earnings in the 2H20F are likely to come in stronger than our previous forecasts thanks to higher crush margins.
• A special dividend could be in store as well, but the quantum is unclear.
• We reiterate ADD and expect the next leg of a re-rating could come when YKA fetches a better-than-expected IPO pricing or performs well upon listing.

Positive news flow likely to continue in 2H20F

• Post the 1H20 results briefing, we remain positive on Wilmar for the following reasons:
  1. 2H performance should stay resilient.
  2. It is one approval away from the listing of its China subsidiary, Yihai Kerry Arawana (YKA), on ChiNext. If YKA fetches 38x P/E, its market cap could exceed Wilmar’s current market cap.
  3. Wilmar said a special dividend could be in store post the listing of YKA but did not provide guidance on the quantum except that it would be dependent on its cash reserves and cash flows. It indicated that the special dividend will not be based on a percentage of YKA’s IPO proceeds.

Upgrading FY20F earnings forecast to reflect better crush margins

• We raise our FY20F earnings forecasts by 15% to reflect higher contributions from oilseeds and grains, as crush margins have stayed strong in 3Q20 thanks to a combination of low raw material prices (low soybean prices and timely purchase of raw materials), low freight costs and recovering demand for soybean meal as impact from African Swine Flu subsides.
• Also it remains positive on the sales growth of its consumer products on strong demand from Chinese consumers for its higher quality food products.
• Lastly, the higher CPO price bodes well for its upstream business, while Wilmar is positive on the earnings prospects of its downstream division, despite multiple regulatory changes to export taxes, levy and biodiesel pricing formula in Indonesia.

YKA potentially worth more than Wilmar’s market cap?

• The group is hoping to list YKA by late-Sep, after receiving the relevant approvals. The IPO pricing will be based on investor demand and its 2019 recurring earnings of YKA of Rmb4.5bn. Wilmar said the current average P/E valuations of comparables listed in the same stock exchange category is 38x. Should YKA’s IPO fetch a 38x P/E valuation, the market cap for YKA (which made up more than 60% of Wilmar’s FY19 earnings) would be around US$24.4bn, higher than Wilmar’s current market cap.
• We estimate the implied P/E for YKA at current share price to be just 22x. We gather that c.3% of the new shares to be sold upon listing will be locked up for one year. As such, free float will be 7%.
• See PDF report attached below for sensitivity analysis of YKA’s valuation on Wilmar's share price.

Retain ADD as market has yet to fully price in the positives

• Reiterate ADD on Wilmar with an unchanged SOP-based Target Price of S$5.53.
• See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
• We like Wilmar for its favourable earnings prospects in 2020. The market could also be undervaluing YKA’s potential value, which is set to be unlocked upon its ChiNext listing. These, coupled with a potential special dividend, are key catalysts for Wilmar.
• Key risks to our call are delays in YKA's listing and lower-than-expected processing margins from its key divisions.

Ivy NG Lee Fang CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-12

SGX Stock Analyst Report ADD MAINTAIN ADD 5.530 SAME 5.530