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DBS keeps Wilmar at 'buy', shrugs off potential balance sheet and earnings impact from Adani joint venture

The Edge Singapore
The Edge Singapore2/6/2023 04:30 PM GMT+08  • 3 min read
DBS keeps Wilmar at 'buy', shrugs off potential balance sheet and earnings impact from Adani joint venture
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William Simadiputra of DBS Group Research has kept his “buy” call on Wilmar International, as he believes that the recent short selling attack suffered by Adani Wilmar Limited (AWL), which has an India-listed joint venture with Wilmar, should see no impact to the Singapore-listed palm oil giant.

In his Feb 3 note, Simadiputra notes that prior gains booked by Wilmar in 1QFY2022 ended March 2022 arose from revaluation and dilution of its interest post AWL listing, not marked to post-listing AWL’s share price appreciation.

Back in 1QFY2022, following the IPO of AWL, Wilmar booked a gain of US$180 million ($238.9 million) from the revaluation of the stake, which was also diluted from 50% to 44%.

“The gain was not a result of a mark-to-market gain arising from AWL positive share price performance post listing,” notes Simadiputra.

He estimates that the value of AWL’s stake is carried on Wilmar’s books at US$440 million as of December 2022, and that the share of earnings booked was US$25 million for 1HFY2022.

“The size of AWL’s exposure on Wilmar’s balance sheet and income statement is relatively small to its own earnings estimated at US$2.3 billion for FY2022.

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“Wilmar accounts for its investment in AWL through equity accounting method, and hence share price fluctuation in the latter will not be reflected on Wilmar’s income statement,” says Simadiputra.

Citing Hindenburg Research, the short seller, the analyst notes that AWL has a relatively strong balance sheet relative to other AWL’s listed companies, with net-debt-to-EBITDA of 1.9x, which is lower than the industry average of 2.9x, as well as a healthy current ratio of 1.2x.

The recent correction suffered by AWL was most likely driven the previous rich valuation of more than 60 times earnings, and not merely from the Hindenburg report, says the DBS analyst.

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Meanwhile, AWL is seen to have a strong a consumer products business and portfolio to sustain its operation going forward, further making possibility of write-down in values low.

The analyst’s $6.67 target price, derived using a sum-of-the-parts valuation methodology, implies a FY2023 P/E of 16.5x.

In contrast, Wilmar trades at just 10x earnings. “Wilmar is mispriced as just another palm oil company,” he adds.

As the company enlarges its footprint in the consumer branded products segment, Simadiputra believes that Wilmar should trade at a higher P/E multiple.

“We believe Wilmar will be able to maintain its earnings performance amid commodity price volatility as Wilmar’s products have resilient demand.”

“Wilmar’s investments in midstream and downstream segments will create a strong platform that would enable the company to adapt to external challenges and deliver consistent margins and returns to investors,” he says.

As at 4.26 pm on Feb 6, Wilmar traded at $4.03, down 0.49% for the day and down 8.41% over the past year.

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