SINGAPORE (June 20): UOB KayHian is maintaining Wilmar International at “buy” after its China operations took another step closer to a spinoff and A-share listing in the fourth quarter.

RHB says Wilmar’s current China operations contribute about 60% of group PAT. The IPO proceeds would be used for the expansion of wheat flour, rice milling and soybean crushing capacities in China.

“The IPO would likely make Wilmar one of the largest listed vegetable oil and food ingredient producers by market capitalisation,” says lead analyst Leow Huey Chuen in a Thursday report.

RHB has a target price of $3.9 or 12.8 times FY20F earnings.

Based on China Securities Regulatory Commission’s (CSRC) website, Wilmar China’s subsidiary Yihai Kerry Arawana Holdings Co (Yihai Kerry) has successfully completed the guidance process required by CSRC in three months.

Yihai Kerry contributed about 59% of Wilmar’s 2018 net profit. Based on its financial statements, Yihai Kerry reported net profits of RMB5.28 billion ($1.04 billion), RMB5.52 billion and RMB0.83 billion for 2017, 2018 and 1Q19 respectively. These make up 72%, 59% and 46% of Wilmar’s yearly net profit respectively.

According to Leow, Yihai Kerry should have a market cap of US$12-13 billion ($16.3-17.7 billion) at IPO with current shareholder equity of US$9 billion.

The next step for Yihai Kerry is to submit the listing application and filing of draft prospectus which is likely to be in July, says Leow, and the official listing date would depend on when the CSRC approval is issued.

“Based on the guidance during the analyst briefing in May 19, the listing targeted for 4Q19,” says Leow.

Wilmar says the IPO proceeds will be largely utilised for expansion in China. With a 10% listing, proceeds from the IPO are expected to be at around US$1.2-1.3 billion.

This is in line with management’s 2019 capex guidance of US$1.5-1.6 billion which is higher than the US$1.3 billion and US$0.94 billion spent in 2017 and 2018 respectively.

Higher allocations could go towards to rice and flour, which are just starting to see consumer purchases slowly migrating to premium brands.

As at 12.03pm, Wilmar shares are down 1 cent at $3.54.