Following the news that one of Wilmar International’s major shareholders, Archer Daniels Midland Co (ADM) has sold some 170.5 million shares at a placement price of $4.40, shares in Wilmar plunged over 10% on August 20, although the agribusiness group has seen a slight climb in its share price on August 21.
On that, CGS-CIMB analysts Ivy Ng and Nagulan Ravi have maintained their “add” recommendation on Wilmar with an unchanged target price of $5.53.
“We believe [the sale] was to allow ADM to unlock value of its investments in Wilmar… given Wilmar’s strong share price performance year-to-date,” say the analysts in a report dated August 21.
ADM raised its stake in Wilmar to 24.8% in 2019 from 19% in 2015. ADM says it plans to retain a 20% interest in the group.
Following the news, ADM also revealed that it has priced its US$300 million ($410.6 million) zero coupon exchangeable bonds at 104% of its principal amount. The bonds will not bear any interest and will mature on Aug 26, 2023.
The bonds will be exchangeable for shares in Wilmar.
On the exercise of their exchange rights, the bond holders will be entitled to receive 50,597.0453 Wilmar shares for each US$200,000 principal amount of the bonds, this number being subject to further adjustments in accordance with its terms.
“We estimate that upon full conversion of bonds, holders will receive 75.9m Wilmar shares or 1.2% stake in Wilmar. This will cut ADM’s stake in Wilmar to 20.9%,” say Ng and Ravi.
On the 10% plunge in share price on August 20 to $4.36, Ng and Ravi believe that was “due to concerns over share overhang from the placement of Wilmar shares”, as ADM’s placement price represents a 9.5% discount to Wilmar’s closing price of $4.86 on August 19.
“We are not too concerned about the potential overhang from the exchangeable bonds as we estimate the rate of conversion values Wilmar at $5.38 (US$3.95) per share, 23% higher than the current share price. It is also not clear whether the bond holders will be allowed to exchange the bonds into shares before it is due in 2023,” they continue.
Despite the dip in share price, Ng and Ravi continue to remain optimistic on Wilmar due to the planned China IPO of its subsidiary Yihai Kerry Arawana (YKA), which is pending final registration approval.
“We like Wilmar for its favourable earnings prospects in 2020. The market could also be underestimating YKA’s potential value, which is set to be unlocked upon its ChiNext listing,” note the analysts.
“These, coupled with a potential special dividend, are key catalysts for Wilmar. Key risks to our call are delays in YKA's listing, lower-than-expected processing margins from its key divisions, and share placement by major shareholders at a discount to market price,” they add.
As at 12.37pm, shares in Wilmar were trading 8 cents higher, or 1.8% up, at $4.44.
