Wilmar International - UOB Kay Hian 2020-11-02: 3Q20 Results Above Expectations


Wilmar International - 3Q20 Results Above Expectations

  • Wilmar’s 3Q20 core net profit came in above our expectations on the back of strong performance from consumer products and oilseeds & grains, supported by robust sales volumes. Earnings growth should remain positive with:
    1. sales volumes remaining healthy, thanks the Chinese economy’s rebound; and
    2. easing of lockdown measures in other countries.
  • Wilmar also announced its plan to distribute 15% of Yihai Kerry Arawana (YKA)’s IPO proceeds as special dividend.
  • Maintain BUY. Target price: S$5.35.

Wilmar's 3Q20 results above expectations.

  • Wilmar International (SGX:F34) reported a 3Q20 core net profit of US$501m (+52% q-o-q, +20% y-o-y), marking the highest 3Q core net profit ever recorded since its listing. This brought its 9M20 core net profit to US$1,137m, above our expectations where it accounted 84% of our full-year estimate.
  • The strong set of results was supported by strong contribution from consumer packs (high demand for food products) and oilseeds & grains (higher crushing activities as the African swine fever situation in China has eased).
  • The results were further boosted by better performances from the plantation and sugar milling segments, benefitting from higher selling prices.

Robust sales volumes in 3Q20.

  • Overall food product sales volumes had increased by 22% q-o-q and 16% y-o-y, mainly driven by sugar and flour product sales. Sales of medium-pack and bulk food products showed a strong recovery (+18% q-o-q, +15% y-o-y) after the easing of lockdown measures.
  • Feed and industrial product sales had also increased on the back of strong sugar merchandising and ramp-up in soybean crushing activities. The weakness in tropical oil sales (dropped by 8% y-o-y) did not come as a surprise to us, given that CPO production was muted. However, resilient refining margins should have contributed good earnings to Wilmar’s bottom line.

Wilmar's outlook remains positive.

  • We expect sales volumes from China to remain robust with the economy having rebounded and we also expect a pick-up in other Asian countries where lockdown measures have eased. With the tightness in global vegetable oils supply balance, palm prices are expected to remain firm into early-21. This would continue to benefit its plantation segment over the next quarter.
  • Wilmar's management had also mentioned that processing margins for tropical oils and oilseed crushing margins were expected to be satisfactory for the rest of the year.
  • Sugar operations are expected to do well for this year, aided by a strong white sugar premium and the recent recovery in sugar prices.

Special dividend from YKA listing.

  • The board had announced a special dividend of approximately 15% from Yihai Kerry Arawana’s (YKA) initial public offering (IPO) proceeds of US$2.05b (or ~6.6 S cents, dividend yield of 1.6%), which will be declared in 2021. The details of the special dividend will be disclosed in Feb 21 together with Wilmar’s 2020 full-year results. This is lower than market expectations of a 25-30% payout.
  • There is a possibility that Wilmar will declare a higher final dividend, given that the company’s full-year core net profit is expected to be better than guidance.
  • For 2019, Wilmar declared a total dividend/per share of 12.5 S cents and had declared an interim dividend of 4 S cents in Aug 20 for the financial year ending 2020. See Wilmar Dividend History.

YKA’s 9M20 earnings surpassed guidance.

  • YKA reported net profits of Rmb2.1b (+10% y-o-y) and Rmb5.1b (+36% y-o-y) on the back of 14% y-o-y and 12% y-o-y growth in revenue for 3Q20 and 9M20 respectively. See Wilmar's announcement dated 30-Oct. The reported 9M20 net profit was higher than management guidance (issued in Aug 20) of Rmb4.0b-4.6b.
  • Factoring in the effective 90% stake, YKA’s 3Q20 and 9M20 net profit make up 50% and 57% of Wilmar’s 3Q20 and 9M20 net profits respectively.

Maintain earnings forecasts.

  • We maintain our forecasted Wilmar's 2020F/21F/22F EPS at 21.1 US cents, 21.5 US cents and 22.4 US cents respectively.
  • Our target price is based on 2021F EPS and reflects a blended 24x 2020F PE for China operations and blended 11x PE for non-China operations.

Huge holding company discount not justifiable.

  • Based on the last closing price, YKA has a total market cap of US$37.3b vs Wilmar’s US$18.8b. As a holding company of YKA, Wilmar is currently trading at an almost 50% discount to YKA, which is not justifiable. This has the other divisions appearing undervalued and also places Wilmar as a much cheaper entry into YKA.

Wilmar's share price rerating from YKA.

Leow Huay Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-02
SGX Stock Analyst Report BUY MAINTAIN BUY 5.350 SAME 5.350