UOB Kay Hian has maintained its buy call on Wilmar International with a target price of $5.35, as Yihai Kerry Arawana Holdings (YKA) listed on the Shenzhen Stock Exchange ChiNext Board on Oct 15.
Analysts Leow Huey Chuen and Jacquelyn Yow said the listing price of YKA listing price is at the higher end of expectations at RMB25.7 ($5.19) per share, valuing at 2019 recurring profit of 31.1x price-to-earnings ratio (PE).
YKA’s market value makes up about 83.5% of Wilmar’s current value and presents a 20% price increase. As such, YKA’s market value would be the same as Wilmar, and YKA’s share price performance upon listing would be a catalyst to Wilmar’s share price.
The analysts pointed out that all share prices of recent IPOs which are listed on Shenzhen ChiNext are trading much higher than their IPO prices, with the Day 1 price increase ranging from 43% to 1,601%.
However, this is considering that there will be no trading limit cap for the first five days of trading on Shenzhen ChiNext; after which, there will be a trading limit cap of 20%.
They also note that the lock-up period for Wilmar’s stakes in YKA is 36 months. In addition, if the closing price of YKA is lower than the issue price for 20 consecutive trading days within the 6-month period post-IPO, or the closing price at the end of 6 months after the IPO, is lower than the issue price, then Wilmar’s lock-up period will be extended by another 6 months.
Separately, the analysts said results for 3QFY2020 could be better than expectations. This could be due to better soybean crushing volume and crushing margins y-o-y and q-o-q, as well as better sugar performance from higher sales volume and refining margins.
They also said they expect better consumer sales volume, as Wilmar retained most of the market share gain during the lockdown in China in 1Q2020.
Based on that, Leow and Yow estimate that Wilmar’s 3QFY2020 core net profit could now come within the range of US$390 million ($530.2 million) to US$410 million, compared to the 3Q19 figure of US$419 million.
For 4Q2020, they expect stronger recovery of the sales volume from the medium pack & bulk segment, and better margins for oilseeds & grains and tropical oils on the back of recent strength in global prices.
See: Wilmar's share price offers cheaper, more liquid entry to YKA, says CGS-CIMB
As such, Wilmar’s core net profit could come in at 3-5% above current estimates, or 10-11% above consensus in 2020.
The analysts also expect a potential special dividend post-listing of YKA, which could lift dividend yield by 2-2.5 percentage points (assuming 25-30% payout from the IPO proceeds) on top of the expected 3% yield from the annual dividend.
As at 1.34 pm, shares of Wilmar were trading at $4.51, with a FY20 price to book ratio of 1.3 and dividend yield of 2.5%.
