Wilmar International - UOB Kay Hian 2022-05-05: China Operations Are Showing Improvement

WILMAR INTERNATIONAL LIMITED (SGX:F34)

Wilmar International - China Operations Are Showing Improvement

Wilmar’s China operations are showing good improvement in 2Q22, especially the consumer packs and soybean crushing segments. Thus, the performance of YKA is likely to be better in 2Q22 than in 1Q22.
In addition, the selective palm product export ban in Indonesia is expected to have marginal impact to the bottom line if the ban is lifted within a short period of time. The real impact on palm downstream margin is from the sharp rise in exports levy.

Recall that Wilmar (SGX:F34)'s 1Q22 core profit excludes the one-off gain from dilution of Adani Wilmar which was below expectations and the variance came from poor performance of Yihai Kerry Arawana (YKA). During the briefing, Wilmar's management commented that YKA’s performance is improving and that it is likely to deliver a better set of results vs the core net profit of just RMB114m (~US$17m) for 1Q22.
The two main segments that were badly affected in 1Q22 are showing signs of improvement.
1. Consumer packs: The profit margin is expected to improve with recent weakness in raw material prices and they managed to increase the selling prices for some of the products in early-22 (before the lockdown). Even with the recent lockdowns in China, the management mentioned that their operations would not be much affected as they have factories all over China. Yet, some of their factories (located near the lockdown regions) are actually benefitting with higher sales volume observed.
2. Soybean crushing: The improvement of its crushing operations in China is mainly supported by lower soybean price while seeing better demand for animal feeds on the back of a recovery in the hog and poultry industries. For 1Q22, the soybean crushing operation was loss-making.

Wilmar's management is of the view that the recent Indonesia ban on exports of certain palm products is likely to be temporary and will be lifted once the cooking oil prices are near to the country’s target of Rp14,000/kg (for bulk and unbranded cooking oil). This is in line with our view.
We understand that the cooking oil prices have started to drop since the announcement of the palm oil export ban. The management mentioned that if the export ban is only for the short term, it might not affect the bottom line too much. On top of that, Wilmar’s cooking oil sales volume is from higher-end cooking oil and hence will not experience much impact.
The Indonesian oleocoemical operations are not much affected by the export ban (which is not included), however, we expect lower margin due to the higher export duty.

The investigation by the Indonesian Attorney General’s Office (AGO) in relation to export licences of palm products are still ongoing. Management mentioned that when the domestic market operation (DMO) and domestic price obligation (DPO) are still in place in Feb and Mar 22, Wilmar was very supportive by supplying more that the required cooking oil to the domestic market at a loss.
The management had highlighted that Wilmar firmly believes that 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.

The Central Kitchen Park (CKP) project is progressing well with the first facility in Hangzhou commencing operations earlier in Apr 22. It started to provide meals to the quarantined in Shanghai and Hangzhou, and will be supplying meals for the coming Asian Games in Hangzhou.
Overall, the CKP operation is expected to break even or have small operating losses in the first year of operations. Besides supplying the ingredients, CKP is also getting rental income from space renting and warehouses. The other central kitchens in Chongqing, Langfang and Xi’an are progressing well.

The one-off gain from the dilution of its interest in Adani Wilmar Limited (AWL) amounting to US$175.6m booked in 1Q22 arose from the IPO proceeds with the 6% dilution against the book value. AWL is required to increase its free float to 25% within three years upon listing, which means Wilmar still need to dilute another 6.5% of its current holding in AWL after one year of moratorium and before the end of the third year upon listing (listed on 8 Feb 22).
Based on the current trading of AWL, the potential gain from this 6.5% dilution is estimated at around US$800m or US$0.127/share.

During the question-and-answer session at the Annual General Meeting on 21 Apr 22, management in its reply to questions on strategy to unlock shareholders’ value mentioned that there are several options for Wilmar to unlock shareholder value, which include listing more of its operations, selling additional shares in the listed subsidiaries, buying back shares, distributing some of the listed subsidiaries to Wilmar shareholders or taking the company private. But Wilmar is not actively pursuing any of these options because it is now busy with many good projects in China, Indonesia, India and other countries.
Yesterday, Wilmar bought back 3,626,600 Wilmar shares from the open market at a price of S$4.40-4.43/share. This was the first share buy back from the open market in 2022.

We are maintaining our earnings forecast for Wilmar as the shortfall in 1Q22 was made up by the gain from the stakes dilution in Adani Wilmar. Our current net profit forecast is at US$1.77b, US$1.82b and US$2.0b for 2022, 2023 and 2024 respectively.
Maintain BUY rating on Wilmar with target price of S$5.50. Our target price is derived using the 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 in sourcing of raw materials.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2022-05-05

SGX Stock Analyst Report BUY MAINTAIN BUY 5.500 SAME 5.500