Analysts from CGS-CIMB Research and UOB Kay Hian Research have maintained their “add” and “buy” ratings for Wilmar International with target prices (TPs) of $4.68 and $5.50 respectively.
Their reports come ahead of Wilmar’s 3QFY2022 results ended Sept 30, which is scheduled to be released after trading hours on Oct 28.
CGS-CIMB analysts Ivy Ng and Nagulan Ravi expect a good set of 3QFY2022 results from Wilmar, projecting the company to report a core net profit of US$600 million ($856 million) to US$650 million for the quarter — broadly in line with 2QFY2022’s US$652 million but higher than 3QFY2021’s US$576 million and Bloomberg consensus forecast of US$445 million.
“3Q has traditionally been Wilmar’s best earnings quarter, driven by festive demand and seasonally higher palm oil output. Also, sugar profit contribution kicks in during 3Q as June to November is the crushing season for sugar cane in Australia,” they say in their report dated Oct 19.
Wilmar’s 3QFY2022 tropical oil segment should also have benefited from Indonesia’s move to waive palm oil export levy till end-October and raise the domestic market obligation (DMO) to 9x, after the lifting of its palm oil export ban, the analysts add.
Although their FY2022 earnings per share (EPS) forecast has been raised by 14% to reflect the better-than-expected profit margin for the tropical oil and food product segments, the analysts have cut their FY2023 to FY2024 EPS by 3% to 8% as they assume lower sales volumes in view of slower global growth.
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Say Ng and Ravi: “Wilmar’s share price has declined 15% year-to-date (ytd) despite strong 1HFY2022 earnings. We attribute this partly to concerns over rising interest rates, the strong USD, weaker commodity prices and geopolitical risks.”
They note that its share price climbed at the start of the year to peak at $4.87 but lost all the gains and more after posting its 2QFY2022 results on Aug 4.
“Fundamentally, our view is that Wilmar’s long-term business prospects remain strong and its investments in new facilities will expand the group’s earnings base. On top of this, we believe Wilmar may be on track for record earnings in FY2022, but the market has not appreciated this due to weak market sentiment over macro and geopolitical risk concerns,” they say.
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Issues that could be causing investors concern include rising US interest rates, falling palm oil prices, the strong USD affecting earnings, as the the group derives most of its profit from China and Southeast Asia, and rising concerns over geopolitical risks such as the tense relationship between the US and China over Taiwan.
To reflect the market sentiment, the analysts have lowered their sum-of-the-parts (SOTP)-based TP from $5.69 to $4.68 to reflect to the latest share price of its listed subsidiaries and ex-rate, with the lower TP close to Wilmar’s book value of $4.39 as at June 30, which represents a price-to-book value (P/BV) of 1.07x.
Meanwhile, Leow Huey Chuen and Jacquelyn Yow of UOB Kay Hian are more conservatively estimating Wilmar to report a core net profit of US$470 million to US$490 million for 3QFY2022, with industry trends that observed for 3Q2022 signalling the possibility of stronger earnings, which could come within US$530 million to US$550 million supported by better-than-expected margins from palm oil downstream and soybean crushing.
In their report dated Oct 19, Leow and Yow note that Wilmar’s operations in China are likely to beat expectations due to: better crushing margins, although the margins will not be as high as the last two years, and higher sales volume for consumer packs and soybean meals.
“Wilmar may have captured larger market shares for the food ingredients and feeds markets in China as its peers were affected by the unscheduled shutdowns caused by power shortages and the spike in soybean meal (SBM) prices due to short-term supply squeeze,” they say.
On the other hand, they point out that sugar may not perform well as the crushing season in Queensland was delayed by heavy rainfall. “The third La Nina led to heavy rainfall in Australia, which is affecting the sugar milling season in Queensland. This may result in a delay in the milling season and cause some earnings to be booked in 4QFY2022 compared to the usual 3QFY2022 and a lower sugar yield, as the high rainfall could reduce sugar production,” the analysts explain.
They have their net profit earnings forecasts for FY2022, FY2023 and FY2024 at US$1.79 billion, US$1.83 billion and US$2.01 billion respectively.
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Their TP of $5.50 is derived from a SOTP valuation by pegging a FY2022 price-to-earnings ratio (P/E) of 17x for Wilmar’s China operations and a blended 11x P/E for the company’s non-China operations, translating to a blended 2023 P/E of 15.3x.
The way CGS-CIMB’s Ng and Ravi see it, the market has more than priced in its macroeconomic concerns. They estimate that in the “worst case scenario” where Wilmar’s share price falls to its previous P/BV low in 2020, the downside to its share price is 6% to $3.29.
However, they believe Wilmar’s share price could re-rate closer to 1x or 1.3x P/BV if the market concerns abate through the delivery of strong earnings and further pursuit of value-unlocking exercise.
“We estimate the potential upside to share price could range from 25% to 62% to $4.40 and $5.70 respectively,” say the analysts, noting that from a P/E valuation perspective, Wilmar currently trades at 1.5 standard deviations (s.d.) below its 12-month forward rolling P/E.
As at 11.18am, shares in Wilmar were trading at 3 cents or 0.85% up at $3.58 and a dividend yield of 4.61%.
