SINGAPORE (Aug 21): The African Swine Fever is spreading fast among the pig population in Asia and showing no signs of abating.
Initially, famers in Asia thought they could contain the virus by quarantining and killing infected animals.
But these all changed after the virus landed in China -- home to half the world’s pig population -- and later spread to Vietnam and Taiwan.
While the virus is harmless to human, it is highly contagious and fatal to pigs and farmers are now very worried.
Agri-business giant Wilmar International had also underestimated the impact of the African Swine Fever on soybean demand which is used as a feed for pigs.
In fact, the African Swine Fever epidemic caused Wilmar’s core net profit in its latest 2Q19 results to drop by almost half to US$176.8 million from US$351.8 million in 2Q18, as it impacted crush margins.
Fortunately, this was partially offset by strong performance from Wilmar's other segments like Consumer Products and Oleochemicals.
See: Wilmar reports 52.3% fall in 2Q19 earnings to US$151 mil on lower crush margin
In addition, Wilmar's plans to list its 99.99%-owned China subsidiary, Yihai Kerry Arawana (YKA), on the Shenzhen Stock Exchange, is progressing smoothly.
YKA is one of the largest agribusiness and food processing companies in China. Its business activities include the processing and sales of kitchen food, feed ingredients and oleochemicals in China.
In an Aug 16 report by UOB Kay Hian, analyst Leow Huey Chuen says, “A lot of concerns were raised on the possible delay of the listing to 2020, given that we are only 4.5 months away from 2020. Based on the progress and communication with authorities in China, management remains confident that the listing will take place by this year and regardless of market conditions, the listing will proceed.”
On the other hand, RHB Research analyst Juliana Cai said although the African Swine Fever issue will take several years to eradicate, lowering China's hog production will be partially offset by strong growth in the poultry sector.
In addition, the slowing economy, due partly to the US-China trade conflict, has not impacted the domestic food consumption in China. Instead, it is seeing stronger demand for better quality food products, as such the group is not overly concerned about the current external environment.
Both UOB and RHB have “buy” calls on Wilmar with target prices of $4.40 and $4.50, respectively.
In an Aug 13 report, CGS-CIMB Research analyst Ivy Ng Lee Fang says of YKA's IPO, “We raise our valuations for its oilseeds and grains as well as palm and lauric business to 1.2x P/BV, as we expect the listing will unlock value for the oilseeds and grains business. We continue to like Wilmar for its attractive valuations and proposed plan to list its China operations.”
CGS-CIMB has an “add” recommendation on Wilmar with a target price of $4.58.
Nevertheless, some other analysts are not as optimism. For instance, Maybank Kim Eng has downgraded Wilmar to “hold” with a lower target price of $3.89 from $4.21.
In an Aug 14 report, analyst Thilan Wickramasinghe says, “Visibility of a full recovery from the African Swine Fever in China remains unclear creating downside risks.”
Wickramasinghe believes that it will take years for a full recovery from the African Swine Fever, creating significant medium term margin visibility challenges. However, he expects the increase in palm oil demand in China and higher bio-diesel mandates in Indonesia to support growth and partially offsetting weakness in Oilseeds & Sugar.
As at 1.00pm, shares in Wilmar are trading at $3.77 or about 1.1 times FY19 book with a dividend yield of 2.3%, based on Maybank Kim Eng’s estimates.
