Wilmar 1Q22 Results Preview - UOB Kay Hian 2022-04-20: Could See Record Contribution From Palm


Wilmar 1Q22 Results Preview - Could See Record Contribution From Palm

  • Wilmar International is scheduled to release its 1Q22 financial update on 29 Apr 22. We are expecting a core net profit of US$360m-380m (1Q21: US$424m). Key factors leading to a lower y-o-y profit are a poorer performance from Yihai Kerry Arawana (YKA) and higher effective tax rate.
  • In 1Q21, the China consumer packs business has yet to be impacted by the surge in raw material prices and includes a reversal of MTM losses on hedging derivatives.
  • Maintain BUY. Target price: S$5.50.

Disruptive 1Q22 distorted trade flow and pricing.

  • Wilmar International (SGX:F34) is scheduled to release its 1Q22 financial update on 29 Apr 22. 1Q22 is a tough quarter to do an earnings estimate, as it was an eventful quarter with most agri-commodity prices surging to new or almost new highs when Russia started its attack on Ukraine on 24 Feb 22. On top of that, the flip-flopping policies by the Indonesia government on palm oil domestic obligations and exports also disrupted the trade flow and distorted the palm oil market pricing between Indonesia and Malaysia. China’s zero-COVID tolerance policies led to the lockdown of two major cities, Shenzhen and Shanghai, which are relatively big consumer markets and will have an impact on Wilmar’s sales in China.
  • Expecting lower earnings y-o-y and q-o-q for 1Q22. We are expecting Wilmar International's 1Q22 core net profit to be within the range of US$360m to US$380m, which is lower than US$424m for 1Q21 and US$534m for 4Q21.
  • To recap, 1H is usually weaker compared to 2H and based on the last three financial years, 1H core profit contribution ranged from 34% to 43% of full-year core profit. 1Q is usually better than 2Q due to festive demand in 1Q. To recap, in 1Q21, there were two one-off items that boosted earnings, ie reversal of hedging losses and higher effective tax rate.

Palm oil – The golden oil now.

  • There is a high possibility that Wilmar International’s 1Q22 core net profit will largely be contributed by its palm-related operations, especially from upstream. Upstream earnings will be boosted by the strong CPO ASP, while sales volume may be lower y-o-y due to lower production and also trade disruption from domestic market obligations in Indonesia in Feb 22 and early-Mar 22.
  • In addition, India sugar also should see good contribution on better raw sugar production in India and steady selling price.
  • Contribution from its China operations is expected to be weak given that the consumer pack business still suffered from great margin pressure from high raw material prices and soybean crushing margins have not been good as well.

Cooperating in investigation into Indonesia’s export licences.

  • Yesterday, Wilmar International issued a statement with regard to the investigation by the Indonesian Attorney General’s Office (AGO) in relation to export licenses of palm products. The investigations are still ongoing. In the statement, Wilmar International mentioned that the group firmly believes it has been in compliance with all applicable regulations at all material times with respect to such licences and intends to cooperate with such investigations.
  • To recap, in late-Jan 22, the Indonesian government announced the domestic market obligation (DMO) and domestic price obligation (DPO) to ensure that exporters fulfilled domestic sales volume before issuance of exports license. However, there were many changes since then until the full abolishment of DMO and DPO in late-Mar 22 with the replacement of higher exports levy and direct subsidy to the bulk cooking oil producers.
  • Details of the investigation. The Indonesian AGO has named the Director General of Foreign Trade of the Ministry of Trade along with three other people from the private sector as suspects in the alleged corruption case in granting export facilities for CPO or cooking oil. The three suspects from the private sector are MPT as Commissioner of PT Wilmar Nabati Indonesia, SMA as Senior Manager of Corporate Affairs for Permata Hijau Group and PT as General Manager in the General Affairs Section of PT Musim Mas. The suspects were suspected of committing illegal acts, as follows:
    1. There is an agreement between the applicant and the licensee in the process of issuing export approvals;
    2. Issuance of export approvals to exporters whose licenses should have been refused because they did not meet the requirements, namely:
      • Distributing CPO or RBD Palm Olein is not in accordance with the DPO;
      • Not distributing CPO and RBD Palm Olein domestically as required in the DMO (20% which later increased to 30% of total exports).

Wilmar - Earnings forecast & recommendation

  • Maintain earnings forecasts. We are forecasting a net profit of US$1.77b, US$1.82b and US$2.0b for Wilmar International 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 rating 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 materials.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2022-04-20
SGX Stock Analyst Report BUY MAINTAIN BUY 5.500 SAME 5.500