Wilmar International - DBS Research 2023-01-11: Profiting From External Volatility

Wilmar International - Profiting From External Volatility

  • Post 3Q22 earnings announcement, Wilmar's share price recovered slightly but Wilmar (SGX:F34)’s valuation is still below its 5-year average P/E multiple which we think it offers investors an opportunity to own a well-integrated food company with a strong earnings track record. The company is now mispriced as an upstream palm oil company despite its strong presence in midstream to downstream of food segments.
  • Wilmar's share price correction is overdone in our view as Wilmar itself is still profitable from year to year. We see that the profitability could shift within the various business segments which would highlight its platform flexibility and adaptability to economic and commodity price volatility.
  • Meanwhile we believe Wilmar deserves a better valuation than upstream plantation companies as it is transitioning to a more consumer-focused company. Wilmar’s current valuation is distorted as Wilmar is seen as a key palm oil and refined palm oil exporter from Indonesia.
  • Wilmar’s earnings can benefit from its integrated business platform, stretching from upstream plantation, refining to consumer products. This should give Wilmar the flexibility to adapt to external challenges such as pandemic, trade wars, and the Black Sea supply disruption due to the Russia-Ukraine conflict. With its earnings track record, Wilmar deserve a better valuation premium to its upstream plantation peers.

Maintain our target price of S$6.67 for Wilmar

  • We maintain our target price of S$6.67, the highest on the street right now as we believe Wilmar’s strong integrated platform will reward investors with ROE expansion and steady dividend stream. The platform enables Wilmar to penetrate further downstream to the central kitchen as well as downstream products such as condiments and instant noodles.
  • We derive our target price using a blended P/E multiple as we segregate Wilmar’s earnings between its China operation under YKA and ex.China operations. We assume the split between YKA and Wilmar’s earnings is 30:70 in 2023 on easing commodity prices which would help to improve YKA’s its margins. YKA’s earnings contribution is still lower than its historical average at above 50%.
  • We peg Wilmar’s ex. China operations at 13x FY23F P/E. Outside China, Wilmar is one of the largest palm oil exporters with sizable refining facilities. The refining facilities enable Wilmar to reduce the risk of vegetable oil price volatility and provide a cushion during times of weak crushing margins in China as seen in 9M22.
  • A worst-case scenario is if YKA records nil earnings next year and 100% earnings churned from ex. China operations as seen in 2022 - Wilmar will be valued at 70% of our target price or S$4.62 which implies 11% share price upside potential from the current Wilmar's share price. YKA earnings evaporated in 2022 on rising costs but we believe the trend should be gradually manageable in 2023.

YKA’s disappointing earnings dragged share price in 2021- 2022

  • Wilmar overall performance strong despite YKA’s earnings weakness – highlighting portfolio resilience. YKA’s earnings trended lower in 2021 and 2022 mainly on margin compression driven by higher input cost. YKA’s earnings contribution to Wilmar’s consolidated earnings also become less significant.
  • Meanwhile Wilmar has kept overall performance strong with its exposure to upstream and midstream divisions outside China. In our view, we believe the profit shift within the operations should not pose a substantial concern. We believe this a key reason that Wilmar's share price retreated from its peak in 2020 post YKA listing.
  • Historically, YKA has performed well when commodity prices were under pressure as in 2018-2019; YKA’s contribution to Wilmar’s overall earnings can reach 60%- 70%.
  • However, we think the market has ignored Wilmar’s strong platform which can withstand volatility related to external factors such as seen during the pandemic, war and geopolitics. The integrated platform proved solid amid external volatility in the past five years and Wilmar consistently churn net profit of above US$1.5bn per annum.
  • The vegetable oils refining and seeds crushing facilities enable Wilmar to keep its earnings stable as Wilmar sources approximately half of its palm oil from external parties, and it sources it soybean from various countries. Coupled with its logistics fleets those factors will keep Wilmar’s operating cost and capital expenditure in check.

Maintaining FY23F earnings forecast after Wilmar's record-high earnings in 2022

  • We raise our 2022 earnings by 26% to US$2.3bn to account for the stronger than expected 9M22 core net profit of US$1.9bn (+49% y-o-y). We now estimate 4Q22 earnings to be US$480m, in line with quarterly average earnings. 4Q22 earnings will be driven by improving soy crushing margin and consumer products division, while we assume lower refined palm oil selling price on lower palm oil price trend.
  • For 2023, we maintain our earnings forecast of US$1.9bn (-17% y-o-y) as we conservatively assume the profit windfall from extreme commodity price volatility in 2022 due to Indonesia palm oil export regulation changes, and Russia-Ukraine war will be largely absent.
  • Wilmar successfully navigated volatility in 2022 and delivered stronger than expected earnings performance. 2023 earnings performance is expected to be higher than 2021 earnings, which was considered decent amid thinning consumer products margin especially in 2H21.
  • We believe Wilmar will be able to maintain its earnings performance amid commodity price volatility as Wilmar’s products have resilient demand. Wilmar’s investments in midstream and downstream segments will create a strong platform that would enable the company to adapt to external challenges and deliver consistent margins and returns to investors.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.

William Simadiputra DBS Group Research | https://www.dbs.com/insightsdirect/ 2023-01-11

Previous report by DBS:
2021-01-21 Wilmar International - Deserves Higher Valuation Multiples.

Price targets by 4 other brokers at Wilmar Target Prices.
Listing of research reports at Wilmar Analyst Reports.

Relevant links:
Wilmar Share Price History,
Wilmar Announcements,
Wilmar Dividends & Corporate Actions,
Wilmar News Articles

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