WILMAR INTERNATIONAL LIMITED (SGX:F34)
Wilmar International - Slowly Sailing Through High Volatility Market
- Being an integrated agribusiness company, high commodity prices are positive yet also negative to Wilmar International. It is very clear that upstream will be a winner, while mid-to-downstream would be dependent on cost control, efficiency and timely purchase of raw materials.
- Wilmar International has delivered strong performance for 2020 and 2021; 2022 profit could be lower but it will still be the outperformer among the integrated agribusiness companies.
WHAT’S NEW
- Wilmar International (SGX:F34)’s business outlook broadly remains the same as per management highlighted during the breifing on 23 Feb 22. The 3 key takeaways from the conference are:
- Marginal operational impact from the Russia-Ukraine War. Wilmar has a direct exposure to Russia and Ukraine through its JV sunflower crushing plants in Russia and Ukraine. Profit contribution from these JVs to the group’s profit is not significant. On 25 Feb 22, Wilmar announced that its JV in Ukraine, Delta Wilmar, has suspended operations at both its processing plants. While Russia’s plant is still in operation, it is at a lower utilisation. The impact from this war is the surge in wheat prices (+46% since the start of the war), which could affect its flour milling business outside China, if it is unable to pass on the higher costs. The higher wheat prices will not impact its flour business in China as the country is nearly self-sufficient in wheat.
- Sourcing of raw materials is not an issue. Management mentioned that the risk of not being able to secure raw materials is low for Wilmar. Wilmar’s raw material procurement risk is mitigated because its processing operations are largely located in raw material-producing countries, which include palm oil processing in Malaysia and Indonesia, sugar refining in Australia and India, and flour production in China source wheat domestically. The only raw material that is highly dependent on import is its soybean crushing in China. The tightness of soybean supply is marginally eased by the Chinese government releasing the auction of soybean and soybean oil from the national reserve lately.
- Consumer packs business is tough. For countries where Wilmar has direct consumer pack business exposure, Indonesia is the only country that imposed a fixed price on consumer pack cooking oil. This resulted in a substantial squeeze to its consumer packs cooking oil margin in Indonesia. The impact is mitigated with stronger contributions from its palm upstream and mid-stream operations. China suffered the most impact from the consumer pack margin squeeze. Although there is no official price control, there is no aggressive price adjustment to pass down cost because it is a highly competitive market and maintain its market share. We think this segment will see weaker results for 1H22 compared with 2021.
Carbon and climate commitment: Net-zero emmission by 2050.
- Wilmar together with 11 large global agricultural trading and processing companies had made a commitment to a sectoral roadmap for enchanced supply chain action, consistent with a 1.5oC pathway. Wilmar is still working to determine the climate roadmap and targets to publish its roadmap by COP27 by end-22. This roadmap will include the short-to medium-term target for 2030 and 2040. It is committed to improving its climate impact and has done so by:
- primarily utilising renewable energy in 2020 (56% of the group energy consumption), and
- installing a solar capacity of 26.4MWp as of 2021 which generates approximately 28,824 MWh/year.
- For Wilmar's 2022 perfromance, we would like to highlight the following points:
- 2022 performance to be driven by palm and sugar operations. Wilmar’s upstream operation − plantations & sugar milling (20% of Wilmar’s 2021 profit before tax (PBT) vs 5% in 2020) is expected to perform well given high crude palm oil (CPO) and sugar prices. Its midstream operation − feed & industrial (46% of 2021 PBT vs 34% in 2020) − will see good earnings from palm oil and sugar refining offsetting the weakness in China’s soybean crushing operation which is facing low crushing margins and crushing volumes.
- Food products under margin pressure. Wilmar's food products segment (25% of 2021 PBT vs 50% in 2020), which sells packed products to households and HoReCa (hotel, restaurant and catering) and food for industrial use, may continue to see a margin squeeze as increases in raw materials costs are not fully priced in, especially for household products. Prices of food products for industrial use will be more reflective of the hikes in raw material costs with a few months’ time lag and this segment compensates for the weak contributions from household products.
Maintain earnings forecast.
- We are forecasting a net profit of US$1.77b, US$1.82b and US$2.0b for Wilmar in 2022, 2023 and 2024 respectively. 2022 core net profit forecast is 6% lower y-o-y compared with US$1.89b for 2021 as we are expecting lower earnings contributions from its China operations.
- Maintain BUY call on Wilmar with target price of S$5.50 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:
- Stronger recovery in China operations.
- Surprise margin upside from the good timing of sourcing of raw material.
Leow Huey Chuen
UOB Kay Hian Research
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Jacquelyn Yow Hui Li
UOB Kay Hian
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https://research.uobkayhian.com/
2022-03-12
SGX Stock
Analyst Report
5.500
SAME
5.500
