UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have downgraded Wilmar International F34 to “hold” with a lower target price of $3.80 from $4.30 previously.
In their Oct 19 report, the analysts point out that Wilmar’s 3QFY2023 ended September earnings are likely to be weaker than their initial expectations. Based on key market indicators and trends, UOBKH is expecting a core net profit of US$300 million ($412 million) to US$320 million for the quarter, which could be its lowest 3Q profit since 2017.
“Note that 3Q has always been the best quarter for Wilmar due to the festive demand in China and India. Our US$300 million to US$320 million expectation is a significant drop from 3QFY2022’s US$796.7 million,” they add.
That said, the sharp drop should not come as a surprise, the analysts say. Back in 3QFY2022, all palm downstream processors reported their best-ever margins in history due to the market being distorted by the various policy changes in Indonesia.
UOBKH estimates that palm refining margins in 3QFY2022 ranged between US$100 to US$120 per tonne versus 3QFY2023’s US$5 to US$15 per tonne. Palm refining margins normally range between US$10 to US$20 per tonne.
To this end, Leow and Yow adjusted their earnings estimates for FY2023, FY2024 and FY2025 by 18%, 9% and 8% respectively. This comes after their downward revisions in August after Wilmar’s 1HFY2023 briefing.
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“This revision mainly takes into consideration weaker-than-expected profit before tax (PBT) margin from its feed and industrial products segment. Key contributors to this segment would be palm downstream processing and soybean crushing. Both sub-segments are facing intense pressure on PBT margins.
“Palm processing margins are under tremendous pressure as the competitive pricing offered by sunflower and soybean oil from the Black Sea is eating into the palm market’s share. Meanwhile, the fertiliser division is likely to post losses as prices continue trending down, which will partially offset the better contribution from sugar milling,” they add.
Meanwhile, the analysts expect Wilmar’s 90%-owned Yihai Kerry Arawana (YKA) to perform better y-o-y and q-o-q due to a lower base as well as the possibility that the high cost of raw materials will be used up by early 3QFY2023. The quarter was also supported by better sales volume of its kitchen food products, with the recovery of the hotel, restaurant and catering sector in 3QFY2023.
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The analysts note that YKA’s 3QFY2022 performance was disappointing due to businesses being affected by the lockdown of key cities in China aside from high raw materials prices.
“Those negative factors back in 3Q2FY202 may have improved in 3QFY2023 with costs of raw materials declining, leading to an improvement in margins, and the increase in dining out, [which] is expected to boost sales volume,” the analysts say.
As at 1.31pm, shares in Wilmar are trading 7 cents lower or 1.95% down at $3.51.
