Analysts are mostly positive following Wilmar International’s strong set of results for the 3QFY2022 ended Sept 30.
During the quarter, Wilmar’s core net profit surged by 38.2% y-o-y to US$796.7 million ($1.13 billion), while revenue increased by 10.2% y-o-y to US$18.88 billion.
The record quarterly results, the third straight quarter in a row, was driven by good performance across all of Wilmar’s core segments.
In the 9MFY2022, Wilmar’s earnings increased by 49.2% y-o-y to US$19.5 billion while revenue increased by 17.9% y-o-y to US$55.01 billion.
Amid the “buy” calls from the various brokerages, Maybank Securities stands out for its “hold” call by analyst Thilan Wickramasinghe.
While Wilmar’s 3QFY2022 earnings strongly surpassed expectations, the analyst sees its quarterly performance as one that could be difficult to repeat due to the slower economic growth in China, prolonged lockdowns and a recessionary global environment.
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“[These factors] are critical headwinds for margin and volume expansion going forward, in our view,” Wickramasinghe writes. “We see the rising cost of risk delaying catalysts for closing the valuation gap between Wilmar and its parts listed elsewhere.”
In his report dated Oct 31, the analyst notes that the higher margins that contributed to the better-than-expected earnings for the 3QFY2022 may be a one-off for the group.
“The stronger margin was driven by better associate/joint venture (JV) contributions and a lower effective tax rate. Management claims offshore hedges (where tax rates are lower) were in the money as commodity prices fell. This drove profitability in 3Q,” the analyst notes.
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He adds: “Whereas in the past few quarters, physical commodities sold in China drove profitability - tax rates here are higher. Continued commodity price volatility – especially with renewed supply chain uncertainty following escalating Russia-Ukraine tensions may affect the repeatability of a lower effective tax going forward, in our view. Similarly, macro volatility lowers the visibility of associates’ returns.”
Segmentally, Wickramasinghe has lowered his profit before tax (PBT) per metric tonne (MT) for Wilmar’s feed segment by 17%-33% for the FY2023-FY2024. His PBT/MT estimates for Wilmar’s plantations segment has been lowered by 3%-17% for the FY2023-FY2024.
The analyst has, however, raised his earnings per share (EPS) estimates for the FY2022 by 14%. This is to take account of the lower tax and improved associates, although recessionary risks and prolonged China closure has led to the analyst lowering his FY2023-FY2024 estimates by 7%-16%.
Further to his report, Wickramasinghe says he sees “limited near-term catalysts” for the gaps between Wilmar and its subsidiaries, Yihai Kerry Arawana and Adani Wilmar to close given the rising cost of risk and operational uncertainty.
Yihai Kerry Arawana, which is listed in China, is trading at a P/E premium of 250% to the parent (Wilmar), while India-listed Adani Wilmar is trading at a P/E premium of 516% to Wilmar.
In addition to his “hold” call, Wickramasinghe has lowered his target price to $4.27 from $4.47 previously. The lower target price is attributable to his blended discounted cash flow (weighted average cost of capital of 5.3%, 1% terminal growth) and lower target P/E of 26x from 29x after mark-to-market valuations.
Meanwhile, CGS-CIMB Research analysts Ivy Ng and Nagulan Ravi have kept “add” on Wilmar International as the counter has attractive valuations and dividend yield, in their view.
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“Wilmar currently trades at [a] P/E of 9.4x, below its 10-year historical average P/E of 12.6x. It is also trading at only 0.78x P/BV and offers dividend yield of 5.9%,” they write. “Wilmar is undervalued as the current market value of its 90% stake in Yihai Kerry Arawana and 44% stake in Adani Wilmar of US$30.3 billion is 77% higher than its market cap of US$17.1 billion.”
The analysts have kept their target price unchanged at $4.68.
To them, Wilmar seems to be on track for another record-breaking year as it is also likely to post “decent” results for the 4QFY2022.
However, they see that the group’s results for the final quarter are unlikely to surpass that of the group’s stellar 3QFY2022 performance.
“Wilmar is cautiously optimistic about its 4QFY2022 earnings performance; we sense that it sees a repeat of the stellar results in 3QFY2022 as a tall order,” the analysts write. “It expects the palm processing margin to decline q-o-q in 4QFY2022. On top of this, the hedging gains and lower effective tax rate achieved in 3QFY2022 may not be sustainable going into 4QFY2022.”
However, the analysts note that the decline in margins and gains will be partly offset by a stronger performance from Yihai Kerry Arawana due to positive crush margins in China and better profit margin for its food products segment. This is as the impact of price hikes for consumer products will be fully captured in 4QFY2022.
Furthermore, Wilmar indicated that its sugar performance should also do reasonably well in 4QFY2022 due to favourable refining margin and sugar prices, the analysts write.
“We are positive on the group’s medium-term earnings prospects due to its capacity expansion plans, venture into central kitchen operations in China and strong environmental, social and governance (ESG) practices,” say Ng and Ravi.
“We are of the view that market concerns over geopolitical risks, rising rates and strong USD impact on Wilmar’s earnings have been more than reflected in the low P/E valuations of its shares,” they add. “Plans to unlock value could re-rate its share price.”
The Singapore research team from RHB Group Research has also kept “buy” on Wilmar with a lifted target price of $5.40 from $4.95 as the group’s earnings for the 9MFY2022 surpassed expectations at 102%-104% of the brokerage’s forecasts.
Like its counterparts at CGS-CIMB, the RHB team sees Wilmar as “severely undervalued… especially as its combined stake in Yihai Kerry Arawana and Adani Wilmar is almost double the value of its own market capitalisation”. At its current share price levels, Wilmar is trading at an FY2023 P/E of 7.9x, the team points out.
For the FY2022-FY2024, the RHB team has raised its earnings estimates by 8%-14% after raising sales volumes for food products as well as for the feed and industrial division. In its estimates, the team has also factored in a lower crushing margin for the FY2022.
Finally, UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow have kept “buy” on Wilmar as they see the group potentially reporting record-high earnings in the FY2022, making this the third year running.
The analysts have kept their target price unchanged at $5.50. They have also retained their earnings estimates on the back of the seasonally weaker earnings for the 4QFY2022.
Based on their revised earnings in their earlier report, Leow and Yow are expecting Wilmar to report a core net profit of US$450 million to US$460 million for the 4QFY2022.
“It is [the] norm with 4Q profit to come in lower than 3Q due to seasonal factors. From the recent analyst briefing, we gather that [Wilmar’s] 4QFY2022 core profit is likely to be lower than 3QFY2022’s,” the analysts write.
During the briefing with Wilmar’s management, Leow and Yow highlighted that Wilmar’s food products segment may perform better sequentially in the 4QFY2022 on the back of strong sales volumes and good margins as a result of lower raw material prices.
The feed and industrial products segment, on the other hand, is likely to see lower q-o-q earnings due to lower palm processing margins.
Wilmar’s plantation and sugar mill segment for the next quarter will also be supported by forward selling and high sugar prices, the analysts add.
In addition, they expect the group’s margins for tropical oil to remain healthy despite the expected q-o-q dip.
In the FY2023, the analysts are expecting Wilmar to report a lower set of earnings y-o-y at US$1.85 billion.
This is given the absence of liquidity and volatility in commodity pricing, and lower average selling prices (ASPs) for its tropical oil and plantation & sugar mill segments.
“Given the normalised situation, we reckon that Wilmar would still continue to perform better than its peers due to its competitive advantage of having a huge market share and integrated business model,” they write. “These allow Wilmar to have better market information and formulate a better sourcing strategy, and thus achieve a lower-than-peers raw material cost.”
According to them, they remain positive on the stock as its integrated business model enables the group to extract the best value from the business value chain.
The model has delivered a stellar three-year compound annual growth rate (CAGR) of 21% for Wilmar’s core net profit for the FY2019 to FY2022, the analysts point out.
Shares in Wilmar closed 3 cents higher or 0.77% up at $3.91 on Nov 2.
