Wilmar’s China listing for its subsidiary may have saw some unexpected setback previously, but it finally got the green light and analysts are upbeat.
On September 16, Wilmar announced that its 99.99%-owned subsidiary Yihai Kerry Arawana Holdings (YKA) received its final registration approval for listing on the Shenzhen Stock Exchange ChiNext Board from the China Securities Regulatory Commission (CSRC).
YKA will issue new shares (IPO shares) for the listing of about 10% of its issued share capital on an enlarged basis. And it has identified its strategic investors to subscribe for approximately 30% of the IPO Shares, but he final subscription size by the strategic investors and the composition of the strategic investors are still subject to final confirmation by the regulatory authorities.
The listing is estimated to take place by mid-October 2020.
See: Wilmar subsidiary receives final registration approval for China IPO, listing to take place by mid October 2020
On the back of this, UOB Kay Hian and CGS-CIMB have kept their “buy” calls on Wilmar, with target prices of $5.35 and $5.53, respectively.
In a September 15 report, UOB Kay Hian lead analyst Leow Huey Chuen says, “Investors should focus on the potential value creation from YKA listing as well as a potential special dividend. Beyond YKA’s listing, the strong 1H20 earnings have led to a 10% consensus earnings upgrade, and Wilmar could potentially outperform consensus again on better-than-expected margins.”
Recently, Wilmar’s share price experienced a 15% drop, which Leow believes could be due to concern over share overhang from the placement of 170.5 million shares at $4.40 by ADM and issuance of convertible bonds into Wilmar shares at $5.60 (US$4.11); and final regulatory approval for YKA listing taking a longer time than expected, which has raised concerns of further delays or even being rejected.
“The share placement by ADM may lead to short-term overhang on Wilmar’s shares, but we remain positive on Wilmar and foresee strong catalysts for share price from the planned listing of YKA and expected strong 2H20 earnings performance,” says Leow.
He also noted that the share price of the first batch of companies under the ChiNext registration surged between 43% to 1,061% from their issue prices.
In addition, Wilmar’s 1H20 core net profit was better than consensus and led to a 10% consensus earnings upgrade. Leow seems to be more bullish on Wilmar than consensus as he revised earnings estimate to be about 9% above consensus at about 21.1 US cents per share for FY20, as he expects more earnings upgrade once Wilmar announces its 3Q20 financial metrics in early-Nov 20.
Overall, Leow does not foresee any risk of the listing being rejected or aborted and believes that the YKA listing is a value unlocking exercise for Wilmar and could reward shareholders with better dividend payouts in the future as YKA will no longer need to draw on Wilmar’s balance sheet to fund its aggressive expansion.
Meanwhile, CGS-CIMB shares similar sentiments, as lead analyst Ivy Ng says, “We are positive on this as the approval will allow Wilmar to proceed with the listing of YKA. We believe this could further catalyse its share price as the listing will help unlock value for the group’s operations in China, which make up around 60% of the group’s earnings. The next event that investors will be watching out for is the pricing of the IPO.”
The IPO pricing will be based on investor demand and YKA’s 2019 recurring earnings of RMB4.5 billion. Wilmar revealed in its earlier briefing that the average PE valuations of comparables listed in the same stock exchange category is 38 times. Hence, Should YKA’s IPO fetch such PE valuation, the market cap for YKA is estimated to be around US$24.3 billion, higher than Wilmar’s current market cap of US$20.1 billion.
“Despite the near-term setbacks, we remain positive on Wilmar due to its favourable earnings prospects and our view that market could be underestimating YKA’s potential value. These coupled with a potential special dividend post-listing of YKA are the key reasons why we continue to reiterate our ‘add’ with an unchanged SOP-based TP of $5.53,” says Ng.
As at 11.55am, shares in Wilmar are trading at $4.38 or 14.5 times FY20 earnings with a dividend yield of 2.8%, according to UOBKH’s estimates.
