UOB Kay Hian (UOBKH)’s analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have kept their “buy” call on Wilmar International (Wilmar) F34 at an unchanged target price of $5.50 ahead of the group’s results for the 1QFY2023 ended March 31. Wilmar is slated to release its results on April 28.
“Our target price is derived using the sum-of-the-parts (SOTP) valuation by pegging a FY2023 P/E of 17x for the China operations and a blended 11x P/E for the non-China operations. The fair value of $5.50 translates to a blended FY2023 P/E of 15.3x,” they say.
In their report dated April 18, Leow and Yow are expecting the group’s core net profit to come in at around US$350 million ($467.6 million) to US$380 million, which makes up about 18% to 20% of their full-year forecast.
To them, the earnings will largely be coming from a turnaround in Yihai Kerry Arawana (YKA)’s sales volumes y-o-y. This is mainly driven by consumption spending to drive the sales volume for consumer packs and sales for medium and bulk segments due to festival demand. YKA is Wilmar’s Chinese subsidiary. The strong recovery from Wilmar’s China operations is also behind the analysts’ positive outlook for the group.
“YKA’s feed and oleochemical segments may not see strong contribution but are at least expected to be profitable,” they write.
The analysts' confidence is further amplified by their visit to YKA’s central kitchen food park in Hangzhou in late March.
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“We were impressed by the very young and knowledgeable team driving the operations, wider-than-expected product range, and fast take-up rate on the rental space. This is the smallest CK and was the first in operations with a capex of approximately US$50 million,” say the analysts.
This central kitchen is also the official caterer for the Asian Games in Hangzhou, which will be held from Sept 28 to Oct 8.
According to Wilmar’s recent annual general meeting (AGM) response, the central kitchen food parks generate their revenue from multiple sources, such as their own central kitchens, rental income from tenants, sale of their products to tenants and provision of services.
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The turnaround in YKA’s contribution may offset the lower demand from Wilmar’s tropical oils segment, the analysts suggest.
Despite the weak demand, Wilmar’s tropical oils performance in 1QFY2023 may still outperform its peers despite sharp margin compressions, say the analysts.
“Based on our channel checks, most downstream players were complaining about marginal profit or even losses in 1QFY2023 for their downstream operations due to weak demand while
crude palm oil (CPO) price remains relatively firm in 1QFY2023 due to a shortage of supply,” they say.
Although Wilmar’s refining margin may not have higher profit margins with the absence of market volatility, the analysts think that the segment may still report a relatively healthy margin in 1QFY2023 with its integrated model, economies of scale and better timing when securing its feedstock.
Finally, the analysts expect some profit contribution from Wilmar’s sugar milling segment with the harvesting season delayed to January.
While sugar milling does not usually contribute to the first half of profits as milling season starts in the second quarter of the year, high rainfall in Queensland has delayed harvesting which caused some of the milling profits to carry over to 1QFY2023.
“This compensated for the weaker contributions from palm oil, while sugar merchandising continues to benefit from a larger white sugar premium,” say the analysts.
Shares at Wilmar International closed 1 cent higher at $4.10 on April 19.
