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It’s a 'buy' for Wilmar as its India IPO 'back on track': analysts

Felicia Tan
Felicia Tan9/29/2021 07:51 PM GMT+08  • 5 min read
It’s a 'buy' for Wilmar as its India IPO 'back on track': analysts
Citi, CGS-CIMB and UOB Kay Hian have pegged Wilmar's TP to be at $5.71, $6.15 and $6.40 respectively.
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Analysts are keeping their “buy” calls on Wilmar International as the agricultural group’s joint venture (JV) in India, Adani Wilmar, announced that its Indian initial public offering (IPO) is moving ahead.

See: Wilmar India JV's IPO back in motion

The announcement was made by Wilmar on the SGX after the market close on Sept 27.

Citi Research analyst Jame Osman estimates that the listing may be completed by end-2021 or early-2022.

The management of Adani Enterprises, the other 50% stakeholder in Adani Wilmar, has shared that it intends to begin roadshows for the JV “in about a week’s time”.

Clearing feedback from the Securities and Exchange Board of India (SEBI) would be the final hurdle to listing, he notes.

“Based on the draft red herring prospectus (DRHP) industry peer group price-to-earnings (P/E) of 44 times - 82 times, the potential market value of AWL may be between US$4.1 billion ($5.56 billion) to US$7.6 billion,” he writes in a report dated Sept 28.

Should there be any prospects of a special dividend, similar to when Wilmar paid out a special dividend of 6.5 cents per share after it had raised US$2.05 billion from issuing 10% new shares in its Chinese subsidiary Yihai Kerry Arawana (YKA), it would be around 1 cent per share, says Osman.

“In our view, a successful AWL listing will enable Wilmar to further entrench its market leadership position and brand visibility in two of the largest consumer growth markets globally (China and India), where it seeks to drive longer-term value by tapping on anticipated demand for higher-quality food staples. Similar to YKA, AWL aims to ramp up its food and fast-moving consumer goods (FMCG) business to ride on the growing preference for packaged branded products,” he adds.

On China’s current power restriction measures, Wilmar has already stated that the impact to its Chinese operations have been “minimal”.

The measures came as provincial authorities seek to meet Chinese president Xi Jinping’s goal of reaching carbon neutrality by 2060.

Wilmar operates over 350 manufacturing plants, including 78 crushing plants across 25 provinces in China.

Its Chinese subsidiary, YKA has so far avoided full-scale plant shut downs, as it had to mainly adhere to timing requirements.

To that end, Osman says preserving food security would remain a higher priority agenda compared to other industries, as consumer demand is expected to pick up seasonally toward the year end.

“We believe Wilmar’s scale and superior supply chain put it in an advantageous position vis-a-vis smaller peers to manage the varying power restriction curbs across provinces and capture market share in the near-term. A near-term supply squeeze could also push soybean meal prices higher and support margin performance,” he writes.

Osman has given Wilmar a target price estimate of $5.71, which is set at a P/E ratio of 16.9 times and 1 standard deviation (s.d.) above its past-10-year average of 14.2 times.

“[Wilmar’s] current valuations of 11 times FY2022 P/E ratio over 1 s.d. below past 10-year mean look attractive to us. Our 2021-2023 earnings per share (EPS) forecasts are 4% to 9% above consensus,” he says.

CGS-CIMB Research analysts Ivy Ng and Nagulan Ravi are maintaining their target price of $6.15 as Wilmar’s IPO plan for Adani Wilmar is now “under progress”.

“We view this as a positive development as it suggests that the listing of Adani Wilmar is back on track after just slightly over one month of observation by SEBI. We gather that the timeline from draft prospectus to listing in India could take eight to 12 weeks, based on the experience of other companies,” write Ng and Ravi in a Sept 28 report.

“This suggest that there is a chance the group could still list AWL either late this year or in 1QFY2022, and this could serve as a catalyst for the stock,” they add.

According to Ng and Ravi’s estimates, the listing of AWL could net Wilmar a potential gain of US$1.6 billion to US$2.5 billion, or 33 cents to 52 cents per Wilmar share.

“The stock is currently undervalued and offers a cheaper and more liquid entry into its 90%-owned Yihai Kerry Arawana (YKA), listed on the Shenzhen bourse,” say Ng and Ravi.

Downside risks, say the analysts, are the group’s inability to pass on higher commodity prices to consumers. The listing of AWL falling through may be another downside risk to the counter.

UOB Kay Hian analysts Jacquelyn Yow and Leow Huey Chuen have also kept their target price of $6.40.

In a report dated Sept 27, the analysts say they “like” Wilmar for its “diversified and integrated business model which has delivered good results performance despite the global uncertainty in 2020 and 1HFY2021 amid the Covid-19 pandemic”.

Like the rest of the brokerage houses, Yow and Leow see “limited disruption” to Wilmar’s China operations from the country’s electricity rationing.

Conversely, the temporary operational shutdown in the country has led to an increase in soymeal prices, which will boost soybean crushing margins.

“Thus, Wilmar will benefit from better margins and possibly higher sales volume, as supplies from some peers are being affected by the temporary shutdown,” they write.

As it is, Wilmar has established several initiatives to reduce its overall energy consumption and lower its dependency on coal.

YKA is rolling out photovoltaic (PV) power plants across its factories in China, where it will build PV power generation systems on the roofs of its existing factories in Fangcheng and Taizhou.

Shares in Wilmar closed 4 cents lower or 0.96% down at $4.14 on Sept 29, with an FY2021 P/B of 1 times and dividend yield of 3.63%, according to CGS-CIMB’s estimates.

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