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Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM

 

Wilmar International 2Q19 Results Preview - No Suprises; Market Focusing More on YKA Listing

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  • WILMAR INTERNATIONAL LIMITED (SGX:F34) is scheduled to report 2Q19 results on 13 Aug 19.
  • 2Q is seasonally the weakest quarter as consumer pack sales are low and also a non-milling season for sugar. 2Q19 results are likely to be a non-event as investors are focusing more on Yihai Kerry Arawana Holdings (YKA) listing. We are expecting core net profit of US$235m-255m (1Q19: US$250m).
  • Maintain BUY with a higher target price of S$4.50 after changing our SOTP-valuation to value-blended 23x PE for China operation and 11x PE for non-China operations.

What’s New

Star performer.

  • Wilmar’s share price is up 30.1% ytd, the third-best performing stock in the FSSTI.
  • Wilmar is gaining more investors’ attention, given that the listing of its China operation - Yihai Kerry Arawana Holdings (YKA) - is getting closer now. In addition, the clear disclosure in the draft prospectus also addresses the concern of high China soybean crushing exposure.
  • As disclosed, 65-70% of YKA’s turnover and operating profit comes from the kitchen food segment which comprises sales of consumer packs, bulk sales to the hotels and restaurants, and sales of food ingredients to manufacturers. Feeds & olechemical makes up the balance.

Not expecting any suprises in 2Q19 results.

  • Wilmar's 2Q19 results are in China when the US-China trade tension got started. Tropical oil will be the key earnings contributor in 2Q19 with low feedstock prices and good sales volume.

Events in the dividend.

  • The next capex funding, allowing Wilmar to potentially declare a better dividend. Assuming it pays 30% of net proceeds, this could translate to a special dividend of S$0.085- S$0.10/share, or an additional 2-2.5% dividend yield.

Stock Impact

Market’s YKA.

  • Wilmar announced that the China will retain majority control in YKA with an expected 89.99% stake post-IPO.
  • The net IPO proceeds are for the funding of YKA’s capex requirements of about US$2b. The listing date is pending the approval of CSRS, which may take another 2-4 months of waiting, but still on track for 4Q19 listing.

Strong market leadership in China.

  • The disclosure reaffirms that Wilmar has a strong market presence in key food segments, ie branded consumer cooking oils, oilseeds and grains crushing, flour and noodles. Wilmar has a 45% market share in consumer pack cooking oil with a strong “金龙鱼” brand.

Better crushing operation offset by weaker consumer pack contribution.

  • Despite the absence of losses from soybean crushing due to shipment arrival of expensive soybean in 1Q19, contribution from oilseeds & grains will be dragged by lower contributions from consumer packs and marginal contribution from soybean crushing operation. The recovery in soybean crushing margins in late-2Q19 is likely to be reflected in better margins from oilseeds & grains only in 2H19.

Palm division continues to enjoy good margins and high volume.

  • Depressed palm and palm kernel oil prices in 2Q19 continue to enhance Wilmar’s processing margins in the tropical oil division. In addition, the wider discount to crude oil prices also enhances Wilmar’s biodiesel margins. Thus, we expect this segment to report better y-o-y and q-o-q performances.

2Q is off-peak season for sugar.

  • India’s sugar milling season ends in March, while Australia’s sugar milling season starts in late-May. In Australia, flooding in some regions and drought in others, along with sustained low global sugar prices have tempered the sugar industry’s expectations. Cane crop is estimated to drop 3% y-o-y in 2019.

Earnings Revision / Risk

Maintain earnings forecasts.

  • We maintain our net profit forecasts of US$1.24b, US$1.43b and US$1.51b for 2019-21 respectively.

Valuation / Recommendation

Change in SOTP valuation.

  • We change our China and non-China operations. We also further break down China by YKA.
  • We ascribe 26x 1-year forward PE to kitchen food, in line with the average forward PE for Shenzen CSI Consumer Staple Food Index and 12x 1-year forward PE for feeds & oleochemical. For non-China operations, we apply 12x 1-year forward PE for tropical oil, 10x for sugar and 8x for others.

Maintain BUY with a higher target price of S$4.50

  • (previously S$3.90). Our target price reflects a blended 23x 2019F PE for China operation (assuming 60% of 2019F net profit is from China) and blended 11x PE for non-China operations.

Share Price Catalyst

Listing of YKA.

  • Potentially, the YKA’s IPO pricing will be pegged at 23x 2018 PE (or estimated 18x 2019F PE). With its strong market positioning and branding in China, we do expect a strong share price performance upon listing. This could lift the trading sentiment on Wilmar as well.

Special dividend.

  • Post listing of YKA, we do expect Wilmar to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.

Value-enhancing M&As.

  • The listing of YKA will reduce the funding requirement for Wilmar’s China capex and this gives Wilmar extra financial muscles to embark on the acquisitions of good assets. Any potential M&A is likely to be in downstream assets and which are complementary to its existing operations.

Source: UOB Kay Hian Research - 26 Jul 2019

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