Wilmar International - UOB Kay Hian 2022-02-24: Palm Continues To Be The Driver, While China Operations Still Challenging

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - Palm Continues To Be The Driver, While China Operations Still Challenging

After the analyst briefing, we are of the view that Wilmar's operations in China will remain challenging, while high palm oil and sugar prices will continue to drive the performance of these two segments.
With that, we have lowered our earnings estimates for food products but raised our profit estimates for palm-related operations to factor in the current high prices.

After the analyst briefing, we are of the view that Wilmar International (SGX:F34)’s operations in China will remain challenging. Meanwhile, high palm oil and sugar prices continue to drive the performance of these two segments. With that, we have adjusted down our earnings estimates for food products but increased our profit estimates for palm-related operations to factor in the current high prices.
After the adjustments, our 2022 earnings estimate is revised up by 5.8% to US$1.77b (from US$1.68b) but target price for Wilmar is lowered, with the upward revision mainly accounting for the fact that palm processing commands a lower P/E valuation than consumer packs.

Upstream continues to be the star performer with CPO and sugar prices constantly hitting new highs. Upstream contributed 20% of 2021 PBT, which is significantly higher than 2020 PBT of 4.5%. Palm processing operations could be challenging with a volatile market, but with the right market information and timely purchase of raw materials, this segment will still continue to deliver growth in 2022.
Wilmar's China operations will remain challenging in 2022 because:
1. Soybean crushing margins are lower due to higher soybean price, lower crushing volumes and lower sales. Demand for soybean meal in China is still lacklustre due to a decline in hog farming and feed miller margins.
2. High raw material costs are not fully passed on to the end consumer. Wilmar is not making big adjustments to the selling prices of its consumer products given that consumer sentiment is affected by slower economic activities and frequent lockdowns in areas affected by COVID-19. In addition, it is not wise to be the first producer to lift selling prices and risk losing market share to peers.
3. Lower margins due to higher contributions from operations with lower margins and high-margin products experiencing slower demand. High food inflation is hurting consumer spending and consumers are switching from premium brands to affordable ones. Premium brands usually command better margins than affordable brands.

The new ruling requires exporters to commit 20% of export volumes to the local market at a price fixed under Domestic Price Obligation (DPO). Wilmar is one of the top three household cooking oil suppliers in Indonesia; its current sales in the domestic market should not be a problem for Wilmar to meet the 20% domestic sales obligation.
The negative impact from the potential losses or lower profits from domestic sales will be partly compensated with better export margins as international prices have increased more than domestic prices (good for its feedstocks prices).

China will mull over multiple measures to increase the production capacity of soybean and oilseeds, including improving the subsidy mechanism for soybean and corn farmers. On top of that, the Chinese government will be selling edible oil from its state reserves and auction soybean to increase market supply and cool down the high selling prices.
Even with the government efforts, we reckon China’s oilseed production is still insufficient and raw material costs will rise. Hence, soybean crushing in China should still be challenging in the near term.

The central kitchen may not be a significant contributor to Wilmar’s profit within the next three years, but this investment is part of its integration model. The high rental cost, labour cost and difficulty in retaining chefs have driven up the demand for central kitchens.
Wilmar is in a good position as it has land to construct integrated complexes next to its processing plants. Under this central kitchen model, food processing operators will rent the space from Yihai Kerry Arawana (YKA). In addition, YKA will act as a one-stop centre to supply ingredients and gather other ingredient suppliers to ensure low operating costs and high efficiency.

We have revised up our earnings estimate for 2022 mainly to factor in higher palm oil prices but this is partly offset by lower contributions from the food product and oilseeds divisions in China. We are now forecasting a net profit of US$1.77b (from US$1.68b), US$1.82b and US$2.0b for Wilmar in 2022, 2023 and 2024 respectively.
Maintain BUY with a lower target price of S$5.50 from S$6.00. Despite the higher earnings estimate for 2022, fair value estimate for Wilmar is adjusted down because of higher profit mainly from palm processing operations which command lower P/E valuation than food products. Our fair value for Wilmar is derived using SOTP-based valuation by pegging a 2022F P/E of 17x for the China operations and a blended 11x P/E for the non-China operations.
See
Catalysts: Embarking on value-enhancing M&As, and better-than-expected earnings.

Leow Huey Chuen UOB Kay Hian Research | Jac UOB Kay Hian | https://research.uobkayhian.com/ 2022-02-24

SGX Stock Analyst Report BUY MAINTAIN BUY 5.50 DOWN 6.000