Maybank Kim Eng ups Wilmar's TP to $6.80 due to 'potential surprises on the way'

Maybank Kim Eng analyst Thilan Wickramasinghe has maintained “buy” on Wilmar International with a higher target price of $6.80 from $5.40 previously.

This, he says, is due to “potential surprises on the way” for the agribusiness group.

To this, Wickramasinghe has identified four areas which will benefit the group in 4QFY2020.

The areas are namely: record soybean crush margins, rising palm oil prices, normalising post-Covid-19 activities in China, as well as margin accretive Indonesian export taxes.

Despite the above factors, the group is trading at a 75% discount to its own Chinese listed subsidiary, Yihai Kerry Arawana (YKA), which listed on the Shenzhen Stock Exchange ChiNext Board on Oct 15, 2020.

As such, Wickramasinghe believes that the group may trigger further actions to unlock value.

“While there are advantages by the fact that the holding company is listed in Singapore (such as funding access), the large valuation differential may catalyse further strategies to unlock value,” he says.

“Over the longer term, this may include further asset hive-offs or privatisation, we believe,” he adds.

“While Wilmar has re-rated 21% in the past 1-month, we believe significant upside exists as they execute.”

A better operating environment

Soybean crushing margins, in 4QFY2020, increased three times quarter-on-quarter (q-o-q) to reach its highest levels since records began in 2015.

Chinese hog inventories are up 42% y-o-y, though inventories are still 20% below pre-African Swine Flu (ASF) levels.

As Wilmar is China’s largest soybean crusher, this should result in a “significant upside” to its margins for 4QFY2020.

The 30% increase in palm oil prices in 4Q2020 may also lead to an “upside surprise” for Wilmar’s upstream business.

The recent changes to Indonesian palm oil export taxes should positively impact its refined palm oil exports.

In addition, Wickramasinghe expects further acceleration in demand for Wilmar’s products from hotels or restaurants amid increasing activities in 3QFY2020.

As Wilmar is expected to release its 4QFY2020 end of February, Wickramasinghe has maintained his earnings per share (EPS) estimates on the counter for now.

“However, we update our blended discounted cash flow or DCF (weighted average cost of capital or WACC 5.3%, 1% terminal growth) and peer price-to-earnings or P/E (target P/E of 44 times), to the latest price action of peers,” he says.

“In an abundance of caution, we have reduced the DCF:P/E weighting on the target price from 70:30 to 80:20. YKA trades at 87x 2021E P/E versus 15 times for Wilmar,” he adds.

As at 3.14pm, shares in Wilmar are trading 13 cents higher or 2.6% up at $5.18.

See also: RHB raises Wilmar's TP to $6 as the group rides on CPO price uptrend