RHB maintains a “buy” rating on Wilmar International, but with lowered target price of $5.05 from $5.60 previously, after paring down plantation sector’s price-to-earnings (P/E) to 10 times from 12 times, which gives a potential 21% upside and yield of around 3%.
“While we have raised crude palm oil (CPO) price assumptions across the sector, we believe valuations will remain held back by ESG concerns, resulting in plantation stocks trading below historical valuations,” says RHB, which has raised its FY2021-23 earnings estimate by 1-2%.
“Although Wilmar should not be tarred by the same brush, given its good ESG credentials and partial palm oil exposure, valuation has been unfairly punished.”
The stock, which is trading at 11.3 times FY2022 earnings, is deemed a “steal”, as at this level, it is significantly below its China-listed peers’ that trade at between 32 and 37 times, according to RHB.
RHB expects Wilmar’s earnings to enjoy support from a “stubbornly high” palm oil market, because of weather, weak production in Malaysia and high energy prices.
“While we expect these conditions to remain – keeping prices elevated possibly until 1Q2022 – we expect a more significant moderation of prices to come by mid-2022,” they add.
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The brokerage continues to raise its CPO price assumptions for 2021F-2023F to MYR4,000, MYR3,700 and MYR3,000 per tonne from MYR3,200, MYR3,000 and MYR2,900.
On the other hand, ESG issues are observed to pressure valuations, despite increase in CPO price assumptions. “We continue to apply P/E targets, which are at -0.5 to -1 standard deviation of historical mean to the planters under our coverage,” says RHB.
“We saw a small jump in share prices in October/November, but this phenomenon did not last long – share prices have since fallen back,” they add.
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“We believe ESG concerns continue to linger, especially in recent times when more local Malaysian companies have been called out for labour-related ESG issues.”
Nevertheless, RHB perceives Wilmar International as doing fine on the ESG front, with a good ESG score of 3.00 out of 4.
Significant achievements include achieving a greenhouse gas (GHG) emissions intensity of 0.62 MT CO2e/MT CPO in 2020, and a 24.4% y-o-y reduction achieved by constructing 25 methane capture facilities at its CPO mills, avoiding 598,435 tCO2e of GHG per year.
RHB notes that Wilmar has achieved 77% RSPO (Roundtable on sustainable palm oil) certification at its estates and 75% at its mills, with the target to achieve 100% by 2025.
At 2:23pm, shares in Wilmar International are 1 cent down or 0.24% lower at $4.12 on Dec 17.
