Wilmar International - CGS-CIMB Research 2020-08-21: Placement Of Shares By Archer Daniels Midland (ADM)


Wilmar International - Placement Of Shares By Archer Daniels Midland (ADM)

  • Archer Daniels Midland (ADM) announced that it has sold 170.5m shares (2.68% stake) in Wilmar at a placement price of S$4.40 (9.5% discount to its last closing price).
  • We believe this is to allow ADM to unlock value of its investments in Wilmar. ADM raised its stake in Wilmar from 19% in 2015 to 24.8% in 2019.
  • This development could lead to concerns over short-term overhang on Wilmar shares, but we remain positive on the listing of Yihai Kerry Arawana (YKA).
  • Maintain ADD.

Sale of 170.5m Wilmar shares at S$4.40 by Archer Daniels Midland (ADM)

  • Archer Daniels Midland (ADM), the second largest shareholder of Wilmar International (SGX:F34) with a 24.8% stake (prior to disposal), announced that it has sold 170.5m shares representing a 2.68% stake in Wilmar at a placement price of S$4.40 per share (US$3.23) on 19 Aug (see also Wilmar's announcements).
  • ADM expects the settlement of the block trade to occur on 24 Aug. It plans to use the net proceeds from the disposal of shares for general corporate purposes. We estimate the transaction will raise around US$550m in gross proceeds for ADM.

ADM’s stock borrow arrangement with regards to Wilmar shares

  • ADM also revealed the pricing of its US$300m zero coupon exchangeable bonds due in 2023 at 104% of its principal amount, will not bear any interest, and will mature on 26 Aug 2023. The bonds will be exchangeable for Wilmar shares.
  • On the exercise of their exchange rights, the bond holders will be entitled to receive 50,597.0453 Wilmar shares for each US$200,000 principal amount of the bonds, this number being subject to further adjustments in accordance with its terms.
  • ADM said it will retain at least 20% of the equity in Wilmar after giving effect to the above transactions. We estimate that upon full conversion of bonds, holders will receive 75.9m Wilmar shares or 1.2% stake in Wilmar. This will cut ADM’s stake in Wilmar to 20.9%.

Share overhang concerns led to correction in Wilmar’s share price

  • Wilmar's share price fell 10.3% yesterday to S$4.36, which we believe is due to concerns over share overhang from the placement of Wilmar shares. This is because the placement price represents a 9.5% discount to Wilmar’s closing price of S$4.86 on 19 Aug.
  • We are not too concerned about the potential overhang from the exchangeable bonds as we estimate the rate of conversion values Wilmar at S$5.38 (US$3.95) per share, 23% higher than the current share price. It is also not clear whether the bond holders will be allowed to exchange the bonds into shares before it is due in 2023.

ADM remains a long-term shareholder of Wilmar

  • Archer Daniels Midland (ADM) (listed in the US) is a long-term shareholder of Wilmar. It emerged as a substantial shareholder of Wilmar following its merger with Kuok Oils and Grains Pte Ltd, PGEO Group Sdn Bhd and PPB Oil Palms in a deal worth US$2.7bn in 2017.
  • ADM had a 16.1% stake in Wilmar in 2008 but has raised its stake over the years to 24.8% in 2019. Our checks revealed that ADM significantly raised its stake in Wilmar by around 4%-pts in 2016/2017 and paid around S$3.09-3.68 per share. As such, we are of the view that ADM’s recent move to place out some of its shareholdings in Wilmar is to unlock value given Wilmar’s strong share price performance YTD.

Maintain ADD despite short-term setbacks in share prices

  • We are of the view that the share placement by ADM may lead to short-term overhang on Wilmar shares, but we remain positive on Wilmar on the planned listing of Yihai Kerry Arawana (YKA) SZSE ChiNext Board which is pending final registration approval from CSRC.
  • Reiterate ADD with an unchanged SOP-based Target Price. We like Wilmar for its favourable earnings prospects in 2020. The market could also be underestimating 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.
  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
  • Key risks to our call are delays in YKA's listing, lower-than-expected processing margins from its key divisions, and share placement by major shareholders at a discount to market price.

Ivy NG Lee Fang CFA CGS-CIMB Research | Nagulan RAVI CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-21
SGX Stock Analyst Report ADD MAINTAIN ADD 5.530 SAME 5.530