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

WILMAR INTERNATIONAL LIMITED (SGX:F34)

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 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.

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.

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.

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 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.

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.

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.

See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
With its strong market position and branding in China, YKA’s share price had increased by +179% from its IPO price at Rmb25.70/share to Rmb45.99/share. And yet, Wilmar's share price had dropped by 7% from the YKA listing to date. We expect Wilmar's share price to rerate on the back of strong earnings contribution from YKA (contributing about 60% to Wilmar earnings) and the current discount between YKA's and Wilmar's share price.

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