CGS International (CGSI) analyst Tay Wee Kuang has maintained his “add” call on Wilmar International F34 amid expectations of flat 2QFY2024 earnings for the group due to stable commodity prices throughout the quarter.
“Wheat, a key ingredient for Wilmar’s branded rice and noodle under its food products segment, saw prices increase 5.4% q-o-q in 2Q2024,” notes the analyst in his July 12 note.
Despite this, Tay believes that the continued recovery of consumption in China and India will result in better sales volume which could offset cost pressures.
For Wilmar’s feed and industrial products, while soybean crush margins in China turned negative since the middle of June, the average margin of RMB139.8 ($25.83) per metric tonne in 2Q2024 was an improvement from negative RMB287.4 per metric tonne in 1Q2024, writes the analyst.
“Furthermore, the mend in pork prices could support better demand for soybean meal, a key product of soybean crushing and feed ingredient for animal feed, going into 2HFY2024,” he adds.
In the case of Wilmar’s sugar milling operations, Tay notes that crude palm oil (CPO) prices have remained relatively stable, while easing sugar prices, which decreased by 13.3% q-o-q, reflect some weakness in the segment for 2QFY2024.
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That said, Wilmar’s share price is likely to be weighed down in the near term due to the recent spate of negative news and coupled with the lack of catalysts.
On July 10, several media outlets, including Bloomberg, alleged that several major Chinese companies had compromised food safety standards by transporting cooking oil with fuel tankers without prior washing and disinfecting. The scandal was exposed by China’s state-run newspaper, Beijing News.
Following the news, Wilmar’s 89.99%-owned Chinese subsidiary, Yihai Kerry Arawana, saw its share price dip by as much as 8.2%, on July 10. Yihai Kerry Arawana owns Arawana, the largest cooking oil brand by the volume of sales in China. The dip in share price was likely by association, notes Tay.
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Yihai Kerry Arawana has since asserted to a Shanghai-based media outlet, The Paper, that it was not involved in the incident. The incident comes on the back of an alleged fraud by one of Yihai Kerry Arawana’s China units in January this year. Wilmar also faced concerns over strikes in its Australian sugar mills in June.
To this end, Tay has kept his target price unchanged at $3.94, pegged to 11 times FY2025 P/E, at Wilmar’s five-year mean. The analyst sees a potential re-rating in Wilmar’s share price as he sees a better outlook for the 2HFY2024.
“Wilmar is currently trading at 8.7 times FY2025 P/E after [a] 12.2% share price decline year-to-date (ytd), representing a 33% discount to peers. Its dividend payout of 17 cents for FY2024, based on our estimates, translates into an attractive yield of 5.5%,” says Tay.
Re-rating catalysts identified by Tay include inventory restocking in China supporting sales of its food products, potential interest rate cuts in 2HFY24 translating into lower finance costs and a spike in crude palm oil prices which supports merchandising profitability.
However, adverse weather conditions affecting harvest across its palm and sugar plantations in 2HFY2024, and down-trading of consumption in China and India resulting in margin compression are downside risks.
As at 4.19pm, shares in Wilmar International are trading at 3 cents lower or down 0.95% at $3.14.
