Wilmar International - OCBC Investment 2021-11-02: Good Results But Margin Pressure Remained

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Good Results But Margin Pressure Remained

Wilmar (SGX:F34)’s 3Q21 results beat expectations. Its revenue rose 28.7% y-o-y to US$17.1b while net profit was up 6% y-o-y to US$568.7m, driven by strong contributions from the Feed and Industrial Products (due to good manufacturing margins and stronger demand for downstream tropical oil products) and Plantation and Sugar Milling segments (benefitted from firm CPO and sugar prices).
On the other hand, Food Products segment continued to be impacted by higher raw material costs in 3Q21 as time lag in selling price adjustments affected overall margins. This was also reflected in YKA’s weak 3Q21 results which saw net profit declining by 66% y-o-y to CNY711m, due partly to higher input costs.

For Food Products, sales volume rose marginally by 0.7% y-o-y to 7.5m MT in 3Q21. This growth continued to be driven by higher Medium Pack and Bulk sales volume (+5.5% y-o-y) as more people dined out in China, but partially offset by Consumer Products (-9.1% y-o-y).
Separately, overall sales volume for Feed and Industrial Products fell 17.5% y-o-y to 13.6m MT. The growth in sales of Tropical Oil Products (+4.9% y-o-y) was not enough to offset the decline in Oilseeds and Grains (-20.9% y-o-y), and Sugar (-40.3% y-o-y) due to weaker soybean crushing and sugar merchandising.

Wilmar deliberately reduced soybean crushing volume in 3Q21 as they expect the crushing margin to further improve in 4Q21. Management expects
1. Feed and Industrial Products segment to remain strong in 4Q21 as they foresee manufacturing margins for downstream tropical oil products to remain resilient;
2. Plantation and Sugar Milling business to benefit from firm palm oil and sugar prices; and
3. Food Products segment to perform satisfactorily as margin pressure eases and higher demand due to seasonality impact in 4Q.
Wilmar aims to accelerate its central kitchen development by opening one in 4Q21 and another 3-4 in 2022 to leverage on YKA’s strong brand name, capture the in-demand food business in China, and become a more efficient food producer.
After adjustments, we lower our fair value estimate for Wilmar from S$6.21 to S$6.00.
See

Wilmar lags its peers on its progress in palm oil traceability and in strengthening sustainable certifications, despite some improvements. In addition, its recent exit from the High Carbon Stock Approach (HCSA) Steering Group could raise questions over the transparency and implementation of its environmental conservation programs.
As agricultural operations require handling of heavy machinery, vehicles, and chemicals, Wilmar is exposed to risks tied to potential occupational hazards. Unlike better-performing peers, however, it appears to lack globally recognized certifications for its health and safety management systems.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2021-11-02

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