Wilmar International - DBS Research 2020-11-02: Growth Outlook Intact; Strong Finish Expected For 2020


Wilmar International - Growth Outlook Intact; Strong Finish Expected For 2020

  • Wilmar to maintain positive earnings momentum in 4Q20 and 2021.
  • Wilmar’s valuation gap to Yihai Kerry Arawana (YKA) unlikely to sustain.
  • Special dividend to boost Wilmar's dividend yield to 4%-5%.

Wilmar's 3Q20 results – a winning streak

  • Wilmar International (SGX:F34)'s 3Q20 core net profit was up 19.6% y-o-y/52.4% q-o-q to US$501m. 9M20 core net profit rose to US$1,137m (+34.4% y-o-y) – forming 93% of our full year earnings expectations.
  • The strong performance was broad-based across all core segments, driven by stronger food products demand and higher crushing margins as the African Swine Fever (ASF) situation eased. Higher prices in the quarter also boosted the Plantation and Sugar Milling segment while refining margins for tropical oil and sugar refining remained robust.
  • Yihai Kerry Arawana (YKA)’s performance was an important driver of Wilmar’s 9M20 earnings. Revenue rose to RMB53.0bn (+12.7% y-o-y/+13.7% q-o-q) while attributable profit increased to RMB2.1bn (+16.2% y-o-y/+10.0% q-o-q) on steady development of Kitchen Food business and fading impact of ASF on Feed Ingredients business. YKA’s reported net profit in 9M20 accounted for 64% of Wilmar’s earnings.

Food Products (Consumer products, Medium pack and Bulk) – Insatiable demand powers growth

  • Sales of both Consumer Products, and Medium Pack and Bulk rose by 18.2% and 14.8% y-o-y in 3Q20 respectively.
  • Consumer products demand was driven by increased sales volume of Sugar and Flour products and contributions from Goodman Fielder while Medium Pack and Bulk was led by easing of lockdown measures which likely saw Hotel, Restaurant, and Catering (HORECA) demand returning.
  • Consumer products sales volumes grew 24.9% y-o-y to 7.2m MT in 9M20, while Medium Pack and Bulk sales volumes inched up 0.2% y-o-y to 12.5m MT on a strong post-lockdown recovery.

Raised Wilmar's earnings forecast on absence of capacity constraints

  • The strong set of 9M20 earnings performance prompted us to raise Wilmar's FY20/21 earnings by 12% each, driven by higher top line and profitability performance. We expect Wilmar’s FY20F earnings to reach US$1.36bn and further improve to US$1.38bn in FY21. Our earnings forecast is largely in line with the consensus forecast, as we now expect that Wilmar can maintain strong refining margin performance despite our assumption of 4% y-o-y increase in CPO price next year to US$617 per MT (RM2,540 per MT).
  • With its strong presence in China’s food market and installed production capacity availability (average production plant utilisation stands at only 60% for YKA) , we believe Wilmar will continue to benefit from China’s improving economy as it seems to have successfully tamed COVID-19, while consumer preference for healthier and safer food is here to stay.
  • Beyond China, the easing lockdown measures in some countries such as India and Indonesia also will help to boost its business in the region. Meanwhile, the current strong palm oil price trend will provide another leg of earnings growth for its tropical oil division. Wilmar has proven it can benefit from both upcycle and downcycle edible oil market trends to expand its tropical oil segment earnings.

Earnings delivery and dividend can lead to valuation re-rating

  • Wilmar's share price correction post YKA listing was odd in our view, considering the results are largely stronger than market estimates with q-o-q improvement since the beginning of the year. We believe the current Wilmar's share price valuation is undemanding, and just above its 5-year average multiple of 13.5x.
  • The correction, in our view, took place because Wilmar’s PE multiple touched 16.3x, or +2 standard deviation of its 5-year average multiple in August-September before trading down to +1 standard deviation at around 14x-15x. In addition, Wilmar was also weighed down by the weak sentiment in the stock market in general.
  • As this juncture, the market is largely underestimating Wilmar’s consumer downstream expansion journey and transformation in China under YKA , and its integrated tropical oil business model which should remain profitable across all edible oil market cycles as seen in 2018-1H19 (bear cycle) and 2H19/3Q20 (bull cycle).
  • Wilmar’s ROE is still hovering at the single digit level as it focuses on building up its capacity and platform. We believe it has scope to expand by capitalizing on these investments to expand its market share especially rice & flour, and grow the earnings in the next couple of years.

Wilmar is more affordable and liquid vs YKA; and we cannot underestimate its presence outside China too

  • YKA’s share price is already 50% higher than its listing price, and is trading at 40x FY21F PE. YKA’s market capitalization is now at US$40bn while Wilmar’s is just half of that at US$18bn. In terms of trading liquidity, YKA only floated 10% new shares but the implied conglomerate discount of almost 50% on Wilmar is too wide considering Wilmar still owns 90% of YKA, and ex. YKA business segment has been performing well.
  • The market appetite towards the stock should regain traction if Wilmar continues to post strong earnings. Wilmar has posted decent earnings performance since 2Q19, and is less impacted by the volatility in the commodities price cycle. As Wilmar continues to deliver consistent earnings like in 3Q20, its ROE is also likely to improve to above 9% vs. our current forecast of 7.7% in 2021-2022.
  • Wilmar announced a special dividend 15% of its total net proceeds of US$2.05bn, or U$300m. With a regular payout ratio of 46% and 9M20 earnings of US$1.15bn, we estimate Wilmar’s dividend yield could reach at least 4%-5% this year (13 cents-15 S cents regular dividend based on 45% payout assumption as per our forecast, plus around 6 Scents of special dividend). See Wilmar's dividend history. This is a good start to show investors that YKA’s IPO can deliver tangible value to investors in terms of higher dividend prospects as Wilmar frees up some cash, which we estimate could reach US$400m-500m per annum for inorganic growth , or higher dividend payout ratio for Wilmar’s investors.

Maintain BUY – Wilmar's valuation is undemanding for a strong earnings performer

  • We believe Wilmar is considerably undervalued against its recently listed China subsidiary Yihai Kerry Arawana (YKA) judging from both market capitalization difference and Wilmar’s strong set of earnings – this means the market couldn’t strip out the ex. China operation in Wilmar’s valuation, as its till performing very well.
  • We shift our valuation base to FY21, and we peg Wilmar’s ex. YKA earnings (YKA accounts for 40% of Wilmar’s consolidated FY21F earnings) at 15x PE vs. YKA’s 19x FY21F PE. We believe our assumptions are conservative, as our target multiple for YKA is at around 50% discount to YKA’s existing PE multiple of 38x-40x, while ex. YKA earnings PE multiple is largely in line with Wilmar’s 5-year average PE multiple.
  • See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
  • We also believe that Wilmar’s businesses beyond China is underestimated such as its integrated tropical oil segment that has upstream and downstream products such as biodiesel and branded cooking oil. YKA has 11m tons of edible oil refining capacity and is operating at a 60% utilization rate, while Wilmar’s tropical oil segment reported sales volume of 25m tons in 2019 – we believe this division is underpriced for now despite its strong earnings performance to date.

William Simadiputra DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 5.280 SAME 5.280