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Analysts raise Wilmar's FY2022 earnings forecasts on higher CPO price and processing margins

Felicia Tan
Felicia Tan2/23/2022 05:34 PM GMT+08  • 6 min read
Analysts raise Wilmar's FY2022 earnings forecasts on higher CPO price and processing margins
Shares in Wilmar closed 6 cents lower or 1.3% down at $4.56 on Feb 23.
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Analysts from CGS-CIMB Research, DBS Group Research, Citi Research and RHB Group Research have recommended investors accumulate on shares in Wilmar International after the group reported record earnings of US$1.14 billion ($1.53 billion) for the 2HFY2021 ended December.

Similarly, Wilmar’s earnings for the FY2021 hit a new high of US$1.89 billion, up 23.2% y-o-y.

CGS-CIMB analysts Ivy Ng and Nagulan Ravi have continued their “add” recommendation as Wilmar’s results stood above their expectations thanks to higher refining margins.

Wilmar’s final dividend of 10.5 cents per share was also broadly in line, write the analysts in their Feb 23 report.

“We are positive on Wilmar’s upstream palm oil business as it benefits from high crude palm oil (CPO) prices. Its mid-to-downstream palm business could benefit from the higher volatility in commodity prices if it continues to execute [the] timely purchase of raw materials,” say Ng and Ravi.

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“However, the food products segment could be affected by higher raw material prices, slower demand growth and government regulations to limit price hikes on essential food items. On top of this, the group expects soybean crushing to be challenging in view of high soybean prices and poor hog farming margins in China,” they add.

While the analysts have raised their earnings estimates in FY2022 to FY2023 by 1% to 7% to reflect higher CPO prices and processing margins, they have lowered their target price estimate on Wilmar to $5.69 from $6.15 previously to reflect the current market capitalisation on Yihai Kerry Arawana (YKA) and Adani Wilmar.

The implied FY2022 price-to-earnings (P/E) to the analysts’ revised target price is 15 times.

YKA is a subsidiary of Wilmar, while Adani Wilmar is a 50:50 joint venture (JV) between Wilmar and India’s Adani Group.

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YKA’s IPO shares began trading on the ChiNext board of the Shenzhen Stock Exchange on Oct 15, 2020, while Adani Wilmar’s IPO shares began trading on Feb 8 on the National Stock Exchange of India (NSE) and BSE Limited (formerly Bombay Stock Exchange).

“Wilmar offers attractive FY2022 P/E valuation of 12.3 times and dividend yield of 3.6% for FY2022; these could re-rate its stock,” write the analysts at CGS-CIMB.

Although, key downside risks to the counter include its inability to pass on rising costs and lower processing margin.

In their Feb 23 report, DBS analysts William Simadiputra and Woon Bing Yong have also kept “buy” on Wilmar with an unchanged target price of $6.67.

Wilmar’s core earnings for the 4QFY2021 at US$534 million and FY2021 at US$1.8 billion, too, surpassed their estimates. In a previous report, the analysts have estimated Wilmar’s 4QFY2021 earnings to come in within US$350 million to US$400 million.

Like their counterparts at CGS-CIMB, Simadiputra and Woon feels Wilmar deserves a higher valuation multiple.

Its current share price means the group is trading at plantation companies’ multiples, note the analysts.

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“We believe Wilmar deserves a higher P/E multiple vs. its plantation peers, since beside the high raw material plays, earnings downside risk is minimal. In case the reversal on commodities price, Wilmar’s packaged consumer products margin and earnings set to buffer its earnings performance,” write Simadiputra and Woon.

As it stands, Wilmar is currently “undervalued” considering its strong earnings performance for the FY2021 and its transition to the consumer space.

“With its well-established manufacturing and logistics facilities, Wilmar could penetrate further into consumer segments with stronger pricing power such as in condiment and noodles,” say the analysts from DBS.

“Based on current trends, the Covid-19 situation in China seems to be under control as well as a recovering economy, we expect domestic consumption of oilseeds and other food products to continue benefitting Wilmar,” they add.

In their report, Simadiputra and Woon have raised their FY2022 earnings estimates by 6% to US$1.63 billion mainly on the improving outlook on soybean crushing margins.

“In 2022, considering the high commodities price situation, we assume Wilmar’s China and non-China operation earnings earning split will be 40% and 60% vs. the average historical split ex. 2021 of 60% and 40% respectively,” they write.

Oil refining will also continue to drive Wilmar’s earnings performance in FY2022, they note.

In his Feb 23 report, Citi analyst Jame Osman has kept “buy” on Wilmar with a higher target price of $6.08 from $5.95 previously.

“We continue to favour Wilmar for its continuous efforts to reshape and integrate its businesses as it transforms into an end-to-end producer of quality food staples,” writes Osman.

Like the rest of the analysts, Osman deems Wilmar’s valuations as “undemanding” at 11 times FY2022 P/E, less than 1 standard deviation below its past 10-year mean.

Despite management’s shift towards a more cautious tone for its oilseed crushing and downstream businesses in China, Osman says he sees “scope for sustained overall earnings momentum into FY2022”. He adds that this is “led by stronger performance at its mid- and upstream businesses”.

“Against the backdrop of elevated feedstock prices and inflation concerns, Wilmar’s integrated business model remains well positioned, in our view,” he writes.

In addition to his higher target price estimate, Osman has raised his overall earnings per share (EPS) estimates for the FY2022 to FY2023 by 2% to 3% mainly after factoring in higher CPO price assumptions over the period given the 15% year-to-date rise in prices. This is offer by the lower margin assumptions for Wilmar’s food products segment due to higher input cost environment.

The team at RHB has kept their “buy” call on Wilmar, as its FY2021 performance stood within expectations.

The team has also raised its target price estimate to $5.30 from $5.05 previously, which includes an ESG premium of 2%, based on a revised ESG score of 3.1, given Wilmar’s recent ESG wins.

“2022 should see similar trends, with weaker food product margins being more than offset by stronger refining and milling margins. Wilmar remains severely undervalued, trading at 11 times FY2022 P/E, vs its China-listed peers’ 26-39 times,” writes the team in its Feb 23 report.

The team has raised its net profit assumptions for the FY2022 to FY2023 by 19% to 24% after upping its CPO price and refining margin assumptions. The team has also lowered its assumptions for Wilmar’s crushing margins.

Shares in Wilmar closed 6 cents lower or 1.3% down at $4.56 on Feb 23, with an FY2022 P/B of 1.05 times and dividend yield of 3.67%, according to CGS-CIMB’s estimates.

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