Wilmar International - DBS Research 2021-01-21: Deserves Higher Valuation Multiples

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WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Deserves Higher Valuation Multiples

• Wilmar to benefit from the success of its well-established brand, and after a decade of investments in its distribution channels and production facilities.
• Hence, we believe that Wilmar deserves higher a valuation multiple than its CPO plantation peers.
• Raise Wilmar's FY21-22F earning estimates by 7% on stronger topline growth and profitability.

Excellent play on rising global food demand

• The momentum on global food market is upbeat amid the lingering COVID-19 pandemic. Food security and stricter safety standards have become important aspects in the food industry in 2021, especially in China. These factors will benefit food producers with well-established supply chains and exposure to basic, staple food such as cooking oil, flour and rice, such as Wilmar International (SGX:F34).
• Firm commodity prices followed by Wilmar’s high margin potential e.g. China’s soy crushing margin uptrend, are likely to boost Wilmar’s earnings performance in 2021. We believe the normalising hog population in China also helps the soymeal demand improvement and further recovery in crushing plants utilization rate.
• Wilmar has had a decade of investing and establishing leading market shares and brands in several strategic food segments such as consumer pack vegetable oil, modern channel packaged rice. Coupled with its extensive distribution network in China, India and Indonesia, we believe Wilmar can leveraging on its presence to dive further downstream such as into the condiments segment.

Wilmar's FY21F/22F earning forecast raised by 7% each – well established supply chain will keep margins firm

• We believe Wilmar could top our expectations in 4Q20. We have also raised Wilmar’s FY21F earnings to US$1.48bn, as we expect Wilmar to benefit from strong food demand despite higher input cost potential amid current high commodities price.
• Wilmar owns 43 & 16 liquid & dry bulk vessels, which reduce its dependency on third party chartered vessel availability and pricing, while minimising logistic congestion. Hence, Wilmar should be able to maintain , if not expand, its dominance in China’s food industry. It has a presence in major commodity producer countries such as Indonesia with 8 ports , as well as 7 ports in China. This also helps Wilmar to keep its operational cost in check.
• Wilmar’s strong performance in 2020 has helped to prove its food business model’s resiliency in various commodity price and economy cycles, and we believe its earnings and profitability performance should remain steady on firmer food demand post COVID-19.

Maintain BUY with higher target price of S$6.67

• We believe Wilmar’s valuation can further re-rate post Yihai Kerry Arawana (YKA)’s successful listing and firm 3Q20 earnings performance as
  1. Wilmar can further benefit from its supply chain investment in China and the larger Asia market
  2. there is available installed capacity to meet growing food demand especially around the upcoming CNY festive season.
• Current Wilmar's share price does not reflect its
  1. presence in commodity producing countries which will enable it to efficiently produce high value consumer branded products,
  2. well established supply chain system, and
  3. successful YKA listing with higher valuation multiple than Wilmar’s.
• Wilmar’s valuation is still lower than a decade ago in 2009-2010 (FY09-10 P/E was 23x-25x, shares peaked at S$7.11) – back then, the share price performance was solely driven by bullish commodities price, in our view. However, even at current Wilmar's share price, the market is still ignoring Wilmar’s improved supply chain capabilities and market share after a decade of investment in downstream production facilities, distribution channels and branded products, instead of just relying on the commodity price cycle.
• Thus, Wilmar deserves to re-rate from 13x-14x P/E level, or its 5-year average P/E multiple and which prices Wilmar as a plantation stock, to higher multiple level of 23x-25x in our view. This is supported by the spin-off of YKA in China, which is currently trading at over 40x P/E. YKA current market capitalization is around double than Wilmar’s today.
• See Wilmar Share Price; Wilmar Target Price; Wilmar Analyst Reports; Wilmar Dividend History; Wilmar Announcements; Wilmar Latest News.
• Wilmar's target price of S$6.67 is based on sum of parts (SOP) methodology. This implies 21x FY21F P/E. We have pegged 60% of Wilmar’s 2021 NPAT, which we assume is YKA’s contribution, at 23.8x P/E, while the balance of 40% is pegged at 17x P/E. Refer to the report attached below for further details on Wilmar's SOP valuations. We believe our valuation is conservative, considering that YKA is trading at above 40x P/E, while the plantation universe is trading at 15x-20x P/E.

William Simadiputra DBS Group Research | Woon Bing Yong DBS Research | https://www.dbsvickers.com/ 2021-01-21

SGX Stock Analyst Report BUY MAINTAIN BUY 6.67 UP 5.280