With minimal earnings downside risk, Wilmar International deserves to trade at a premium to its plantation peers’ PE multiples, says DBS Group Research analyst William Simadiputra.
In his March 21 report, Simadiputra says Wilmar’s packaged consumer products’ margins and earnings can help to buffer its earnings performance when commodity prices reverse.
“The consumer downstream business should continue to bear good margins and ROE in the future, especially when Wilmar’s consumer products division’s performance recovers from higher cost pressure via efficiencies or price hikes,” says Simadiputra.
Wilmar is trading at around 11x FY2022 P/E. The company deserves a higher valuation multiple considering its earnings track record and position as one of the leading tropical oil refiners and food processors in Asia, on top of its expansion to branded consumer goods and central kitchens, Simadiputra elaborates.
On the back of the high commodity price environment this year, Simadiputra assumes the earnings split of Wilmar’s China and non-China operations in 2022 to be 30% and 70%, versus its previous assumption of 40% and 60%.
DBS values the China operations at 20x FY2022 P/E while its operations outside of China is pegged to 15.0x FY2022 P/E. Simadiputra believes the P/E multiple for Wilmar’s Chinese subsidiary Yihai Kerry Arawana (YKA) is fair, considering YKA is currently trading at 40x FY2022 consensus P/E.
“Thus, our implied equity value of YKA is only US$11 billion ($14.93 billion_ versus the current market capitalisation of US$38 billion, further upside risk to Wilmar’s valuation,” says Simadiputra.
Outside of China, Wilmar’s branded consumer goods division has a leading presence in India and Indonesia given its sizable edible oil refining capacity in both regions as well as 240,000 hectares of palm oil plantation assets. “Wilmar’s operations beyond China consists of consumer-branded goods such as Sania in Indonesia, which enables it to move further into the downstream consumer market segment in the country.”
Wilmar is one of RHB Group Research analyst Hoe Lee Leng’s top picks as one of the Indonesian planters with downstream exposure. This is amid the flip-flop move by the Indonesian government, which may lead to slightly negative impact to pure planters with Indonesian exposure.
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The Indonesian government made several changes last week, starting with removing the IDR14,000 per liter price ceiling for packaged cooking oil while keeping the price subsidy for bulk cooking oil. Subsequently, it revoked the 30% domestic market obligation (DMO) just a week after raising it from 20%.
Additionally, the Indonesian government also raised the export tax and levies on crude palm oil (CPO) to US$575 per tonne limit if price exceeds US$1,500 per tonne.
Concurring with Hoe, UOB Kay Hian Research analysts Leow Huey Chuen and Jacquelyn Yow note that the Indonesian upstream players would suffer the most impact as they are the ones who bear the export tax and levy. “Based on our estimation, the CPO reference price for April will be closer at US$1,700 per tonne or higher and hence the maximum duty and levy will be US$575 per tonne,” they add.
Raising its FY2022 earnings estimate by 16% to US$1.89 billion, DBS believes Wilmar should be able to maintain its strong performance this year. Acknowledging the forecast to be above consensus, Simadiputra says he believes Wilmar’s operations will be able to offset the impact of rising commodity prices.
DBS, UOB Kay Hian and RHB have all kept their “buy” calls for Wilmar at a target price of $6.67, $5.50 and $5.30 respectively.
As at 10.37am, shares in Wilmar are trading 8 cents higher or 1.7% up at $4.77.
Photo: Bloomberg
