Analysts are remaining positive on Wilmar International, despite mixed sentiments on the group’s business that range from optimism towards upstream earnings to acknowledging disruptive 1QFY2022 ended March trade flow and pricing.
The group is scheduled to release its 1QFY2022 financial update on April 29.
UOB Kay Hian Group Research analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have kept a “buy” rating with a target price of $5.50.
Leow and Yow are upbeat about the high possibility that Wilmar International’s 1QFY2022 core net profit will largely be contributed by its palm-related operations, especially from upstream.
“Upstream earnings will be boosted by the strong crude palm oil (CPO) average selling price (ASP), while sales volume may be lower y-o-y due to lower production and also trade disruption from domestic market obligations in Indonesia in February and early March,” the analysts say.
Additionally, the group’s sugar business in India also should see better contribution from improved raw sugar production with a steady selling price. But contribution from the group’s China operations is expected to be weak in light of the consumer pack business still suffering from significant margin pressure from high raw material prices and soybean crushing margins not being up to par as well.
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Despite the positive scenarios, the analysts admit that the first quarter is a tough one to provide estimates, as it was an eventful quarter with most agri-commodity prices surging to new or almost new highs when Russia started its attack on Ukraine on Feb 24.
In addition, regulatory inconsistencies in policies by the Indonesian government on palm oil domestic obligations and exports also disrupted the trade flow and distorted the palm oil market pricing between Indonesia and Malaysia.
Moreover, China’s zero-Covid-19 tolerance policies led to the lockdown of two major cities, Shenzhen and Shanghai, which are relatively big consumer markets that will have an impact on Wilmar International’s sales in China.
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The analysts expect Wilmar International’s 1QFY2022 core net profit to be within the range of US$360 million ($490 million) to US$380 million, lower than US$424 million for 1QFY2021 and US$534 million for 4QFY2021.
According to Leow and Yow, 1H is usually weaker compared to 2H. “Based on the last three financial years, 1H core profit contribution ranged from 34% to 43% of full-year core profit, where 1Q is usually better than 2Q due to festive demand in 1Q,” say the analysts.
Previously, in 1QFY2021, two one-off items – the reversal of hedging losses and a higher effective tax rate – boosted earnings for the group.
On the other hand, Citi Research analyst Jame Osman has kept a “buy” rating on Wilmar International with a target price of $6.08.
Wilmar International is currently the largest CPO refiner and producer of consumer pack oils in Indonesia. The group had previously shared it had no issues fulfilling Indonesia’s domestic market obligation (DMO)/domestic price obligation (DPO) policies in order to continue its palm oil exports out of Indonesia.
“We continue to expect Wilmar’s strong earnings momentum to persist this year following its record FY2021 performance on the back of an elevated CPO and sugar price environment,” says Osman.
However, according to various news sources, Indonesia’s Attorney General’s Office (AGO) has launched an investigation into corruption involving the approval of export permits that did not comply with requirements set at the time. As such, its latest round of revisions targeting palm oil exports saw a removal of the short-lived DMO and DPO quota which lasted less than two months, and was subsequently replaced with a hike on its maximum palm oil export levies.
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The analyst observes that Wilmar has been compliant with the changing regulatory landscape at all material times in Indonesia however, with its operations in Indonesia currently continuing business as usual.
As at end FY2020, Wilmar International had approximately 42 million metric ton (MT) per annum in subsidiary vegetable oil refining capacity with around 46 of its 156 plants, including edible oil refining, specialty fats, oleochemicals and biodiesel, located in Indonesia.
“As such, we believe the impact of Indonesia’s domestic obligation policies on Wilmar International’s earnings could be mitigated by the company’s diversified supply chain, considering that the group purchases a majority of its feedstock externally for its mid and downstream refining businesses, and as it has a sizeable proportion of its refining capacity outside of Indonesia,” says the analyst, adding that this means less reliance on Indonesia palm oil exports to its other markets.
Some downside risks that the analyst considers include trading risks from commodity prices and counterparty risks, a prolonged challenging operating environment for the group’s oilseeds segment and slower end-demand levels for food & industrial products.
As at 4.32pm, shares in Wilmar International are trading at 1 cent up or 0.22% higher at $4.58 at a FY2022 P/B ratio of 1.0x and dividend yield of 3.3%.
