Analysts from OCBC Investment Research (OIR), RHB Bank Singapore, CGS-CIMB Research and Citi Research have all maintained their “buy” and “add” calls to Wilmar International despite its weak earnings performance of US$550.9 million ($747.81 million) for 1HFY2023, down 52.7% y-o-y.
All the brokerage houses are looking forward to a more profitable 2HFY2023 for Wilmar as it continues to benefit from China’s slower-than-expected recovery.
However, they have all trimmed their target prices, reflecting a more conservative outlook on Wilmar. OIR has lowered it from $4.74 to $4.42, RHB has lowered it from $4.65 to $4.25, CGS-CIMB has lowered it from $4.63 to $4.05, and finally Citi has lowered it from $5.35 to $4.38.
Wilmar’s lacklustre performance was mainly due to a 10% decline in revenue as prices of most commodities decreased, causing lower margins across their key segments, as well as a softer consumer demand in China.
OIR analysts highlight that segmental performances were weighed down by weaker margins, where Wilmar’s pre-tax profit (PBT) for food products decreased by 84% y-o-y to US$82.7 million in 1HFY2023.
This was largely due to unfavourable sales mix, lower sales volume from consumer products, as more people resumed dining out and weaker consumer demand in China, together with weaker margins from 3.3% in 1HFY2022 to 0.6% in 1HFY2023, as a result of high feedstock costs for the flour business.
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The analysts note that the higher priced feedstock inventory has been normalised, leading to better margins in July and Aug 2023 for the flour business.
Feed and industrial products’ PBT fell 21% y-o-y to US$399 million in 1HFY2023, due to lower margins for the mid and downstream tropical oils operation.
This was further dragged by weak crush margin as a result of lower demand from the poultry and hog industries and elevated soybean prices in 2Q2023, although partially offset by stronger sugar merchandising and shipping operations, say the analysts.
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Separately, plantation and sugar milling business’ PBT was down 86% y-o-y to US$62.9 million with weaker performance across palm plantation and sugar milling operations due to lower palm oil prices, lower fresh fruit bunch production and weaker volume of sugar sales in 1HFY2023.
OIR analysts note that Wilmar’s management has guided for a better 2HFY2023, on the back of improved margins as soybean crush margin returned to positive in July, with improvements in animal feed demand.
“Following the results, we revise our growth and margin estimates. Correspondingly, our fair value estimate decreases from $4.74 to $4.42,” they say.
Similarly, RHB analysts note that 1HFY2023 core profit was below expectations, at 32%-35% of FY2023, due to lower-than-expected margins for all divisions amidst a slower-than-expected pick up in China’s demand post uplift of lockdowns.
RHB analysts warn that despite inventory normalising in 2H2023, the situation could still be upended by further increases in raw material prices, especially with the ongoing geopolitical conflict.
They also cut their margin assumptions for oilseeds and grains, to reflect the 1HFY2023 results, and note that supply risks for plantation and sugar milling divisions remain in the form of El Nino.
As a result, RHB analysts have trimmed their FY2023-FY2025 earnings estimates by 3%-28% after reducing their food product, tropical oils, oilseeds and grain margins.
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However, they expect 2HFY2023 to perform better in terms of margins and average selling prices (ASPs), although they are wary of geopolitical risks.
“Despite the weak results, we believe the stock remains undervalued – trading at 10x FY2024 P/E vs China-listed peers’ 20x-40x, while its combined stake in Yihai-Kerry and Adani Wilmar is almost double that of its own market capitalisation,” they add.
Likewise, Tay Wee Kuang and Lim Siew Khee from CGS-CIMB say that they have reduced their sum-of-the-parts based target price after reducing its FY2023/FY2024/FY2025 earnings per share (EPS) estimates by 28.6%/17.3%/5.0%, as they expect Wilmar to slowly return to pre-Covid-19 profitability.
Tay and Lim believe that the weak consumer sentiment in China will not be able to support cost pass-through in the near term, while near-term cost pressures remain as it will take time for higher-priced feedstock such as wheat to be absorbed.
Although they think that sales volumes are likely to continue growing, Wilmar’s FY2023 profitability may continue to be weighed down.
Noting a share price weakness in Wilmar’s listed subsidiaries, Yihai Kerry Arawana and Adani-Wilmar, their target price has been reduced to $4.05.
“We see limited catalysts in the near term due to volatility of raw material costs, as well as overhang from the recent news of Adani looking to sell its 44% stake in Adani-Wilmar,” they say. “Nevertheless, we think Wilmar will continue to benefit from the progressive recovery in China’s economy.”
Finally, Citi analyst Jame Osman says that he continues to view Wilmar as a recessionary and inflationary hedge, and a China reopening play.
He looks to a better 2HFY2023 driven by sales volume recovery as he notes that Wilmar’s management has shared that it has observed an improvement in demand in the market with 1HFY2023 marking a bottom, resulting in an expectation of a better 2HFY2023 h-o-h.
He notes that the magnitude of recovery will unsurprisingly be tied to China’s macro backdrop.
However, unlike the few analysts before him, Osman thinks that El Nino weather impact is an upside tail risk for Wilmar, as higher prices will ultimately benefit their upstream and refining margins.
Osman cuts his FY2023-FY2024 EPS forecasts by 38%/18%/11%, mainly after tempering his margin assumptions to factor 1HFY2023 trends.
His new lowered target price is based on a target multiple of about 12x (about 1 standard deviation (s.d.) below past 10-year mean of about 14x previously, to reflect the near-term uncertainty around consumption recovery.
“Our positive mid- to longer-term structural view of Wilmar and its business model remains intact, considering its positioning as an integrated and diversified food producer in two of the largest consumer growth markets of China and India,” he says. “Valuations remain inexpensive, with the stock trading at FY2024 price earnings ratio of 9x; >1 s.d. below the past 10-year mean of 14.2x.”
As at 3.57pm, shares in Wilmar International are trading 4 cents lower, or 1.10% down at $3.60.
