RHB Group Research is keeping its “buy” call on Wilmar International but with a lower target price of $5.75 from $6.45 previously.
Although CPO prices have somewhat recovered recently, plantation share prices have retreated further, which the research team believes is due to ESG concerns. This devaluation of plantation sector PEs is also likely to be permanent, as investors become more ESG-aware and start pricing it into their investment decisions.
Despite this, RHB believes that Wilmar remains significantly undervalued compared with its China-listed peers.
See also: Wilmar is RHB's top pick as Chinese CPO demand to pick up pace
Recently, CPO prices have bounced back above the RM4,000/tonne mark. But the research team sees more downside than upside risks from hereon.
Supply fundamentals projected for 2022 are improving, with stock/usage ratios for the 17 oils and fats projected to rise to above historical levels in 2022. On demand, the current high prices will affect demand from price-sensitive countries, while reductions in biofuel mandates globally and rolling Covid-19 lockdowns will continue to have a subduing effect.
“We expect CPO prices to start declining in 4Q21, and stay in a southward trend in 1H22. However, we believe the rate of decline may not be as severe as initially expected, given the still-weak productivity seen in Malaysia (YTD-June: -7.6%),” says the research team.
With that, the research team has lifted CPO price assumptions for 2022 to RM3,000/tonne (from RM2,800/tonne) and to RM2,900/tonne (from RM2,700/tonne) for 2023.
“We are maintaining our RM3,200/tonne assumption for 2021, given the aggressive forward-selling policies that have been adopted by corporates, which results in lower realised prices,” says the research team, while lifting net profit forecasts by 2-8%. Wilmar is forecasted to record recurring net profit of US$1.74 million in FY2021 ending December.
Meanwhile, things for Wilmar are expected to get worse before they can get better.
“We believe the negative news flow on the ESG front will likely hamper any price recovery for the sector and things may get worse before they get better. As scrutiny on the sector ramps up, share prices and valuations will get dragged along with it,” says the research team.
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As such, it has trimmed valuation targets for all stocks under its coverage, attributing an ESG discount to valuation targets of 15-35%.
“For Wilmar, we have lowered our valuation target for its plantation, sugar milling, feed and industrial products division to 10 times FY2022 PE (from 12 times), while also lowering our valuation for the consumer products segment to 22 times FY2022 PE (from 26 times). We also cut ESG ratings for Wilmar to 3 (from 3.2) to account for lower scores in the S pillar,” says RHB.
Overall, Wilmar’s earnings and valuations are heavily skewed towards its consumer products and oilseed feed ingredients businesses in China – which account for a hefty >90% of earnings – which means that its valuation is very inexpensive at present. Wilmar is trading at 12x 2022F PE, compared with its China-listed peers’ 32-37x.
As at 3.00pm, shares in Wilmar are trading at $4.38 or 1.0 time FY2021 book value with a dividend yield of 3.0%.
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