Although Wilmar International may post lower profit in 2022, it will still be the outperformer among the integrated agribusiness companies, according to UOB Kay Hian Research analysts Leow Huey Chuen and Jacqueline Yow Hui Li.
In their March 11 report, the analysts note that Wilmar’s 2022 performance will be driven by palm and sugar operations. Wilmar’s upstream operation of plantations and sugar milling, which accounts for 20% of its 2021 profit before tax (PBT), is expected to perform well given high crude palm oil (CPO) and sugar prices.
Meanwhile, its midstream operation of feed and industrial — which accounts for 46% of its 2021 PBT — will see good earnings from palm oil and sugar refining. This will offset the weakness in China’s soybean crushing operation which is facing low crushing margins and crushing volumes.
The analysts add that Wilmar’s food products segment, which accounts for 25% of its 2021 PBT, may continue to see a margin squeeze as increases in raw materials costs are not fully priced in, especially for household products.
“Prices of food products for industrial use will be more reflective of the hikes in raw material costs with a few months’ time lag and this segment compensates for the weak contributions from household products,” they highlight.
The analysts have maintained their forecast net profit of US$1.77 billion, US$1.82 billion and US$2 billion for 2022, 2023 and 2024 respectively. “The 2022 core net profit forecast is 6% lower y-o-y compared with US$1.89 billion for 2021 as we are expecting lower earnings contributions from its China operations."
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UOB KH's target price of $5.50 is derived using SOTP valuation by pegging a 2022 PE of 17x for the China operations and a blended 11x PE for the non-China operations.
Wilmar is one of the top picks for RHB Group Research’s Hoe Lee Leng, who has a “buy” call on the stock with a target price of $5.30. She also has a “buy” call on Bumitama Agri with a target price of 90 cents.
Maintaining “neutral” on the plantation sector, Hoe says RHB’s CPO price assumptions of RM4,300 per tonne for 2022 and RM3,600 per tonne for 2023 will likely need to be revised given the factors affecting prices such as war and changes in regulations. However, this will only be done once prices are less volatile.
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“With the recently announced increase in domestic market obligation (DMO) volumes to 30% from 20%, CPO prices spiked once again yesterday by more than RM600 per tonne. We note that while Indonesian players will have to suffer from higher volumes of output sold at the DMO price of IDR9,300 per kg, the higher export prices will offset this negative impact,”
Companies that would benefit from this offsetting impact would mainly comprise those which export their products out of Indonesia such as Wilmar, First Resources, Golden Agri-Resources, says Hoe.
She adds that companies that completely sell their products locally such as Bumitama Agri may not benefit as much from this price increase, as they would be subject to the Indonesian domestic prices as well as the actual DMO sales.
RHB’s target prices for First Resources and Golden Agri are $2 and 31 cents.
As at 10.10am, shares in Wilmar, Bumitama Agri, First Resources and Golden Agri are trading at $4.57, 74.5 cents, $2.09 and 30 cents respectively.
Photo: Bloomberg
