UOB Kay Hian Research analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have kept their “buy” call on Wilmar International as the company continues its expansion into the central kitchen business.
In their March 31 note, the analysts point out that Wilmar and its Chinese subsidiary Yihai Kerry Arawana's (YKA) construction of the Central Kitchen Food Park (CKFP) in China has been expedited.
The first CKFP facility in Hanzhou has been completed and is in the trial production stage, while four more — located in Langfang, Xi’an, Chongqing and Zhukou — are currently under construction. The CKFP model in China may be duplicated in other countries that Wilmar has integrated operations in, such as India and Indonesia.
Leow and Yeow highlight that the expansion into CKFP is Wilmar’s strategy to reduce the earnings impact from highly volatile commodity prices. This is particularly critical for its operations in China under YKA, where raw material costs make up 88%-90% of its cost of production.
In 2021, the high fluctuation of raw material prices, which cannot be easily passed down to consumers, led to a 41% decline in profit before tax (PBT) from the food products division.
“The consumer packs business is likely to remain challenging in 2022 and expect the better contributions from its medium and bulk packs to mitigate the weaker PBT contribution from consumer packs,” the analysts add.
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Meanwhile, Wimar’s back-to-back soybean crushing margins in China are still challenging, with high soybeans prices not being able to be covered by the sales of soybean meal and soybean oil.
“China’s domestic soybean meal consumption is weak due to poor hog and poultry margins. At the same time, soybean oil consumption is shrinking and its price in China is not keeping up with the rise in international prices. Thus, there will be negative impacts on soybean crushing margin,” Leow and Yeow noted.
Wilmar’s palm and sugar operation, which are enjoying good average selling prices and processing margins should be able to partly mitigate the weakness in consumer packs and soybean crushing in China, the analysts add.
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UOB KH maintains its earnings forecast of US$1.77 billion, US$1.82 billion and US$2 billion net profit for 2022, 2023, and 2024 respectively. The 2022 core net profit forecast is 6% lower y-o-y compared with the US$1.89 billion for 2021, as the analysts are expecting lower earnings contributions from Wilmar’s China operations.
UOB KH’s target price of $5.50 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.
As at 12.37pm, shares in Wilmar International are trading 4 cents lower or 0.85% down at $4.67.
