UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have kept their “buy” recommendation on Wilmar International with an unchanged target price of $6.40 ahead of the agri-food group's results release.
“Our target price is based on FY2021 earnings per share (EPS) and reflects a blended 26 times FY2021 price-to-earnings (P/E) for China operations and blended 11 times P/E for non-China operations,” they write in an Oct 21 report.
The group is slated to release its financial summary for the 3QFY2021 ended September after trading hours on Oct 29.
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On this, Leow and Yow have estimated that the group will report core net profit of US$450 million ($606.5 million) to US$480 million ($646.9 million), a q-o-q increase compared to the US$309 million reported in the 2QFY2021 ended June.
The analysts have also maintained their earnings forecast for the FY2021, FY2022 and FY2023 with core net profits of US$1.66 billion, US$1.78 billion and US$1.95 billion respectively.
The better sequential net profit is attributable to better contribution from the recovery of China’s soybean crushing operation and better consumer pack sales, write Leow and Yow.
“Sugar contributions are usually higher in 2H when sugar milling season starts. Tropical oil will be again the star performer with greater volume and better margins from its timely purchase of raw materials,” they add.
On a y-o-y basis, however, the estimated figure is slightly compared to Wilmar’s core net profit of US$500 million reported in the 3QFY2020, as that was an “exceptionally strong quarter”, note the analysts.
As the volume of soybean crush improves in the 3QFY2021 with higher demand for soymeal, Leow and Yow expect crushing margins and sales volume to recover from the low in the 1HFY2021.
“Sales volumes for soybean meal (SBM) was lower in 1H21 as usage of SBM in the mixed animal feeds was
lower as wheat meal replaced corn meal as wheat price was much cheaper than corn. As corn price weakened while wheat price strengthened, corn regained its share in animal feed formula, which also translated into better SBM sales volume,” they write.
“To recap, if wheat meal is used in animal feeds, less SBM will be used in animal feeds because wheat meal contains higher protein than corn. SBM is mainly used in animal feed as a source of protein.”
Wilmar’s plantation and sugar milling business is also expected to post a “stellar performance” driven by high average selling prices (ASPs) for both crude palm oil (CPO) and raw sugar.
This is despite a flat marginal y-o-y growth due to the weak production as a result of bad weather, note Leow and Yow.
To be sure, Indonesia has been lowering its estimate for palm oil production month by month as yield recovery from the dry spell in 2019 has been delayed. Sugar production in Australia is also expected to be flat y-o-y according to the USDA report issued on Sept 30.
Other impacts to Wilmar’s results include the high raw material prices that may impact its consumer products margins.
Food products, which consist of consumer products and medium pack and bulk make up 35% of Wilmar’s profit before tax for the 1HFY2021 and 50% of FY2020’s profit before tax.
Margins for Wilmar’s profit before tax in this division is expected to be narrower this quarter as the surge in prices for raw materials may not be fully transferred to the selling price for consumer products due to the competition in the market.
For the 1HFY2021, Wilmar’s food products business saw its profit before tax margin drop to 3.14% compared to the 4.77% in the 1HFY2020 and 4.88% in the FY2020.
In other news, the temporary electricity curb in China will not impact Wilmar’s operations severely.
Some plants may be required to shut down for a day or reduce its operating hours, but the overall impact is, according to Leow and Yow, “marginal”.
“On the other hand, the temporary operational shutdown has led to an increase in soymeal prices and will boost soybean crushing margins. Wilmar will benefit from better margins and possibly higher sales volume, as supplies from some peers are being affected by the temporary shutdown,” they write.
The initial public offering (IPO) submitted by Adani Wilmar Limited to be listed on the Securities and Exchange Board of India (SEBI) is on track.
Adani Wilmar is slated to list by end-2021 and early in the 1QFY2022.
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The IPO proceeds will be mainly used to fund Adani Wilmar’s expansion in India and its product range, which will eventually be used to mirror its business model in China.
Overall, the analysts are positive on Wilmar for its “diversified and integrated business model”. The group has so far “delivered good results performance despite the global uncertainty in 2020 and 1HFY2021 amid the Covid-19 pandemic,” they say.
Catalysts to the counter’s share price include it embarking on value-enhancing mergers and acquisitions, as well as better-than-expected earnings.
As at 4.32pm, shares in Wilmar are trading flat at $4.38, with an FY2021 P/B of 1.1 times and dividend yield of 3.2%.
