CGS-CIMB Research analyst Ivy Ng has kept her “add” rating on Wilmar International with an unchanged target price of $6.15 in a March 22 report, on the back of news that Wilmar’s 50%-owned associate, Adani Wilmar (AWL), is making plans for its potential initial public offering (IPO).

AWL has reportedly hired bankers and legal advisers to start work on its initial share sale that could see the company raise as much as 5,000 crores or US$690 million ($928.6 million), according to three insiders.

Investment banks JP Morgan and Kotak Mahindra Capital have been hired to manage the IPO.

According to the source, AWL is looking to raise funds by selling new and existing shares. “But these are still under discussion, and the numbers could change closer to the filing of the IPO papers.”

A successful IPO will make this the seventh Adani group company to be listed on the Indian bourses.

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The way Ng sees it, the potential IPO marks a positive development for Wilmar and could boost its target price if the news is true.

To be sure, Ng says she is “not too surprised” by the news as Wilmar previously indicated that it was exploring the possibility of listing other parts of the group following the successful listing of its subsidiary Yihai Kerry Arawana (YKA) in China.

“Based on Wilmar’s 2019 annual report, we gathered its 50% share of investments in AWL was valued at US$176 million as at Dec 31, 2019. AWL posted a net profit of US$65 million in 2019 on revenue of US$3.2 billion,” notes Ng.

“We observe that listed large-cap FCMG companies in India trade at 2020 price-to-earnings (P/E) range of 19 times to 86 times. Applying various P/E ranges to our FY2021 estimated net profit for AWL suggests potential market value of US$1.4 billion to US$5.7 billion for AWL. The final potential market cap depends on the IPO structure, market valuations, and future plans,” she adds.

To this end, the news is overall “positive” as the AWL listing will allow Wilmar to unlock value for its shareholders should it decide to sell some of its existing stake in AWL and reward investors with special dividends.

“Alternatively, the group could benefit through higher earnings growth prospects from AWL as the group raises funding to accelerate growth and earnings.”

“Our current SOP-based target price conservatively values Wilmar’s AWL stake at 1 times P/BV or US$176 million only. There is potential upside of US$2.7 billion (56 cents per share) to our SOP at the higher end of our sensitivity analysis on market valuation,” she writes.

As at 11.48am, shares in Wilmar are trading 2 cents higher or 0.4% up at $5.35.