It has been a good start to the year for Wilmar International, as the plantation stock continues to set five-year highs in terms of share price. But according to DBS analysts William Simadiputra and Woon Bing Yong, the counter deserves a higher valuation multiple on the back of stronger food demand. They have maintained their “buy” call with a higher target price of $6.67 from $5.28  previously.

“We believe Wilmar could top our expectations in 4QFY2020. We have also raised Wilmar’s FY21F earnings to US$1.48billion ($1.96 billion), as we expect Wilmar to benefit from strong food demand despite higher input cost potential amid current high commodities price,” say the analysts in a 21 January broker’s report. Their FY2021 and FY2022 earnings forecasts have been raised by 7% each. 

The DBS duo sees Wilmar’s valuation further re-rating after Yihai Kerry Arawana (YKA)’s successful listing and Wilmar’s 3QFY2020 earnings performance. It will continue to benefit from supply chain investment in China and the wider Asian reason. There is also available installed capacity to match growing food demand, especially with Chinese New Year coming in February. 

Simadiputra and Woon, therefore, recommend that Wilmar be re-rated from 13 to 14 times P/E. Instead, they argue that it should reflect a higher multiple level of 23-25 times P/E, reflecting the counter’s significant potential in the coming year. China subsidiary YKA is already trading at over 40 times P/E. 

The strong performance stems from rising food demand in global markets, with food security and stricter safety standards likely to become important aspects in the food industry come 2021 - especially in China.  Well-established chains with exposure to basic, staple food like cooking oil and rice could therefore benefit. 

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Wilmar has had a decade of investing and establishing market leadership in several strategic food segments like modern channel packaged rice. This, alongside its extensive distribution networks in large markets like China, India and Indonesia make it best placed to capitalise on this growing food demand. Firm commodity prices and Wilmar’s high margin potential are likely to be supportive of Wilmar’s 2021 earning performance. 

“Wilmar owns 43 & 16 liquid & dry bulk vessels, which reduce its dependency on third-party chartered vessel availability and pricing, while minimising logistic congestion. Hence, Wilmar should be able to maintain, if not expand, its dominance in China’s food industry,” say the analysts. Ports in major commodity producers like Indonesia (eight ports) and China (seven ports) help it keep operating costs in check, remark Simadiputra and Woon. 
 
Markets have yet to price in Wilmar’s presence in commodity-producing countries, which could allow it to produce high-value consumer branded products efficiently. Investors have also not factored in the counter’s well-established supply chain and the successful listing of YKA in China, which now reports a higher valuation multiple than Wilmar’s. 

“Wilmar’s strong performance in 2020 has helped to prove its food business model’s resiliency in various commodity price and economy cycles, and we believe its earnings and profitability performance should remain steady on firmer food demand post-Covid-19,” note Simadiputra and Woon. 

As of 2:05pm, Wilmar International is trading 2.43% up at $5.47. Dividend yield is 2.47% and P/E ratio at 17.43.