Wilmar International - DBS Research 2020-08-12: Positive Performance Continues In 2H20


Wilmar International - Positive Performance Continues In 2H20

  • Wilmar's strong 2Q20 core net profit was above our estimate.
  • Raise FY20/21F earnings by 12%/13% as we expect Wilmar will continue to excel even during the pandemic.
  • YKA listing in 2H20 to support Wilmar’s valuation.

Expecting positive performance to sustain in 2H20

2Q20: Net earnings jumped 86% y-o-y post ASF outbreak

  • Wilmar (SGX:F34)'s 2Q20 core net profit was up 86% y-o-y/7.5% q-o-q to US$329m. This led to 1H20 core net profit rising 49% y-o-y to US$636m - above our expectations. The strong earnings performance was driven by across the board improvement in all business segments especially packaged Consumer Products since consumers are dining more often at home. Wilmar’s crushing margins also improved y-o-y on demand recovery post African Swine Flu (ASF) outbreak last year.
  • Wilmar's 2Q20 consolidated revenue reached US$11.7bn (+20% y-o-y, +7.5% q-o-q), which helped 1H20 revenue to climb 12% y-o-y US$22.7bn, largely on track to meet our and consensus estimates. 1H20 revenue growth was also driven by Goodman Fielder consolidation.

Food Products (Consumer products, Medium packs, Bulk) led the way.

  • Food products posted profit before tax (PBT) of US$495.1m (+21% y-o-y) in 1H20, driven by strong sales of consumer products , however, this was partially offset by weaker sales in the medium pack and bulk businesses due to weak demand from Hotel, Restaurant and Catering (HORECA), especially in 1Q20.
  • Consumer products sales volumes grew 29% y-o-y to 4.7m MT in 1H20 since consumers were dining in more aften and bought high quality products. Medium pack and bulk sales volumes declined 7.5% y-o-y to 7.5m MT. COVID-19 restrictions caused people to dine out less, leading to weaker y-o-y demand for HORECA.

Feed and Industrial Products (Tropical oils, Oilseeds & grains and sugar) – Better crush margins and sales volumes drove strong y-o-y PBT performance.

  • 1H20 PBT from this segment doubled y-o-y to US$371m on the back of strong recovery from oilseeds and grains division as demand in China recovered from the ASF outbreak last year. This led to strong volumes and crush margins in 1H20.
  • 1H20 sales volumes of Oilseeds and Grains rose 22% y-o-y to 10.2m MT while on the other hand, Tropical oils sales volumes declined 7.7% y-o-y to 10.7m MT, likely led by weaker palm oil production in Indonesia. Sugar sales volumes climbed 34% y-o-y to 5.5m MT on higher sugar merchandising activities.

CPO plantation and sugar milling :

  • Losses before taxes narrowed to US$82.9m in 1H20 (1H19 : US$103.5m), thanks to higher palm oil price y-o-y, which helped to offset the impact of low sugar prices in 2Q20. Sugar milling division also recognized US$20m impairment charges related to property, plant and equipment from sugar milling assets in India.

JV earnings doubled y-o-y.

  • Wilmar’s booked strong JV earnings of US$84.1m in 1H20 (1H19 : US$42.8m), led by stronger performances in all investments in China, India and Europe.

Balance sheet: Gearing ratio still lower vs. FY19.

  • 2Q20 net debt increased q-o-q to US$12.6bn (1Q20 : US$11.8bn, 4Q19: US$13.2bn) which translates into a net gearing ratio of 0.77x (FY19: 0.79x).

Earnings forecast: Factoring in the stronger than expected 1H20 performance

  • We raised our FY20/21F earnings by 12%/13% to US$1.21bn/ US$1.24bn, to reflect the stronger than expected 1H20 performance and that Wilmar will continue to deliver steady earnings performance in 2H20. Earnings will be driven by consumer food products, followed by steady feed and industrial products segment. We believe our earnings forecast captures management’s view on 2H20 performance which is ‘cautiously optimistic’ after performing well in 1H20 amid COVID-19 pandemic in China and major countries outside China.
  • Key upside risk in 2H20 will be plantation and sugar mills. If Wilmar can at least break-even in 2H20 on the segment. Plantation earnings should be supported by improving palm oil prices.
  • Our FY20F earnings has inched closer to consensus now. Our lower than consensus earnings forecast previously was attributed to lower margins due to COVID-19 pandemic which had led us to slash our earnings forecasts in March 2020. Wilmar International: Navigating through rough seas

Rating and Target Price : Maintain BUY with higher Target Price of S$5.28

  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
  • We derive a higher target price of S$5.28, as we factor in higher earnings estimates for FY2020/2021 earnings forecast. There is no change to our FY20F PE multiple target for China operations/YKA of 22x (YKA accounts 60% of Wilmar’s FY20F earnings). The possibility for YKA to list above 23x will depend on the market sentiment toward the IPO, in our view. We note that the Shenzen Stock Exchange ChiNext’s average PE multiple is above 50x.
  • There is no close peer comparison for YKA as it is currently on a transitioning journey from seeds crushers to consumer products; our 23x PE multiple for YKA is in line with China’s dominant consumer products peers such as Uni President (220 HK equity) and Tingyi (322 HK equity). Please see our previous report for further details on how we value Wilmar with YKA disclosures and potential listing : Wilmar International: Shifting into higher gear.
  • Yihai Kerry Arawana (YKA) obtained its listing clearance from the Shenzen Stock Exchange (SZSE) ChiNext Board Listing Committee and has submitted an updated prospectus to China Securities Regulatory Commission (CSRC) for final registration approval, and is expected to be listed in 2H20. This listing should help us attach a fair valuation for its consumer products operations, and also push Wilmar and YKA continue to deliver strong earnings. Investor interest should rise closer to the listing.

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-08-12
SGX Stock Analyst Report BUY MAINTAIN BUY 5.28 UP 4.600