Wilmar International - CGS-CIMB Research 2021-05-03: Gearing Up For Medium-Term Growth


Wilmar International - Gearing Up For Medium-Term Growth

  • The declining crush margins in China could lead to weaker 2Q21F vs 1Q21. Steps taken to strengthen competitive edge to bear fruit in 2-3 years.
  • Reiterate ADD on Wilmar. Potential catalysts are plans to unlock value, value-accretive M&As, stronger earnings and narrowing of Wilmar’s valuation gap with YKA.

Difficult to beat record 1Q21 earnings in 2Q21F

  • During its results briefing, Wilmar (SGX:F34) explained that its 1Q21 earnings were boosted by reversal of all the mark-to-market losses on hedging derivatives for soybeans incurred by its feed and industrial products division in 4Q20.
  • Wilmar’s manufacturing margin improved due to higher palm oil refining, oleo and sugar refining margins in 1Q21, driven by the change in export levy in Indonesia and favourable white sugar premium. However, Wilmar revealed that soybean crush margins have declined in recent months and are likely to be weaker relative to the past few quarters. It was reported that the weaker crush margins in China were due to sluggish domestic demand for soymeal and rising costs of soybean imports.
  • The weaker earnings from its crush business will be partly offset by the high ASPs for palm oil and sugar prices. The higher CPO price will benefit its plantation estates while the high sugar prices will benefit its sugar mill operations in Australia. Wilmar is also positive on its food products segment but says that the rise in consumer pack cooking oil prices in China lagged behind the rise in raw material (edible oils) prices as most producers have stocked up raw materials at lower prices.
  • Overall, we project Wilmar's 2Q21F earnings to be weaker compared to 1Q21.

Strengthening its competitive edge to be a global food powerhouse

  • Wilmar is currently strengthening its business model further to provide the group an even stronger competitive edge against its peers. It is building more plants in existing and new complexes in new locations. On top of this, it is developing new high growth and complementary businesses like central kitchen and soy sauce, vinegar and yeast products. This will widen the range of food products it offers and improve its distribution networks. As a result, Wilmar will become more competitive in the medium term due to lower production costs (derived from cost synergies achieved by having multiple facilities in a large integrated complex) and lower logistics and marketing costs.
  • Wilmar is of the view that investors are likely to re-rate its operations once the benefits from its expansion plans are fully recognised, likely in 2-3 years.
  • Wilmar is also looking to unlock shareholders value by exploring potentially listing its 50%-owned Adani Wilmar. See report: Wilmar International - CGS-CIMB Research 2021-03-22: Adani Wilmar Makes Plans For Potential IPO.

Key earnings drivers of Wilmar for FY21F

Ivy NG Lee Fang CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-03
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