CGS International’s (CGSI) Tay Wee Kuang has kept his “add” call on Wilmar International F34 at an unchanged target price of $3.63, as he sees the company benefiting from a lower finance cost in FY2025 due to the US Federal Reserve’s (US Fed) 50 basis point (bps) cut on Sept 18.
“We believe Wilmar’s profitability could further improve with the start of the interest rate cut cycle,” says Tay in his Sept 20 report.
As at 1HFY2024 ended June, Wilmar had US$26.8 billion ($34.6 billion) worth of debt, of which 72.9% was short-term finance required for its origination and merchandising business.
“While [the] breakdown of short-term debt was not provided for 1HFY2024, we note that trade finance-related debt (short-term/pre-shipment loans and trust receipts/bill discounts) made up 90% of its short-term debt as of FY2023,” he writes.
“Given the correlation between Wilmar’s effective interest rate and the US Fed Funds rate (FFR), we believe Wilmar should begin to enjoy lower interest rates going into FY2025 following the 50 bps cut in FFR on Sept 18, which should translate to lower finance cost, assuming prices of key commodities for WIL, such as wheat, crude palm oil (CPO) and sugar, are stable,” he adds.
Further to his report, the analyst is “hopeful” that there are improvements in Chinese consumption.
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In 1HFY2024, Wilmar’s profit before tax margins across all three of its business segments expanded y-o-y. Quarter-to-date (qtd), China’s soybean crush margins improved due to better demand for soybean meal (SBM) as animal feed following higher pork prices. Despite this, soybean crush margins remain negative, but the analyst understands that this may not be reflective of Wilmar’s operational margins.
“Bloomberg reports crush margins using spot soybean, SBM and soybean oil (SBO) while crushers’ actual margins vary according to the cost of soybeans, which depend on the timing of the purchase as there is typically a lead time of two [to] three months to transport soybeans from source countries, like the US and Argentina, to China,” Tay explains.
At its share price of $3.18 as at Tay’s report, Wilmar’s estimated dividend yield of 5.1% looks “attractive” on the back of interest rate cuts.
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His unchanged target price is pegged at an estimated FY2025 P/E of 11 times, which is Wilmar’s five-year mean. He also keeps his estimates unchanged as he had already factored in a lower effective interest rate for FY2024 to FY2026 without pencilling in a decline in overall loans and borrowings observed in 1HFY2024.
Re-rating catalysts noted by him include a declaration of special dividends on the potential stake sale of Adani-Wilmar, while downside risks include adverse weather conditions affecting harvest across its palm and sugar plantations in 2HFY2024 and an escalation in key commodity prices, which would translate to a higher debt load, offsetting the impact of expected lower effective interest rates on the group’s finance cost.
As at 3.21 pm, shares in Wilmar are trading 1 cent lower or 0.32% down at $3.13.
