CGS-CIMB analysts Ivy Ng and Nagulan Ravi have maintained “add” on Wilmar, with the same target price of $5.53, although key downsides to the stock include the potential delay or termination to YKA’s IPO and weaker-than-expected crushing or refining margins.

The report follows Wilmar’s announcement on September 24, that its 99.99%-owned subsidiary Yihai Kerry Arawana Holdings (YKA) will be issuing its shares for its China IPO at RMB25.70 ($5.16) per YKA share.

See: Wilmar subsidiary to IPO at issue price of $5.16; expects to raise $2.79 bil

Through its IPO, YKA expects to raise about RMB13.9 billion ($2.79 billion), which implies the potential market capitalisation of YKA upon listing at its IPO price to be RMB139 billion ($28.0 billion) against Wilmar’s current market capitalisation of US$20.3 billion ($27.92 billion).

“Stripping out Wilmar’s 90% stake in YKA (post listing) at IPO price, it suggests that investors are paying only US$1.6 billion for the rest of Wilmar’s assets (ex-YKA), which generated a net profit of US$593 million in 2019, based on our estimates (2019 price-to-earnings or P/E of 3x),” say Ng and Ravi in a report dated September 25.

“Putting it another way, we estimate the implied P/E for YKA at Wilmar’s current share price to be 17.8x which is at a 43% discount to the IPO price (values ex-YKA business at 14x P/E),” they add.

The way the analysts see it, Wilmar offers a cheaper entry as well as higher liquidity into YKA, as they surmise that the free float for YKA will only be 7%, which is significantly lower than Wilmar’s 30%.

“From a valuation perspective, Wilmar trades at a forward P/E of 16x against YKA’s IPO pricing of 31x. We reiterate our add call with a sum-of-the-parts (SOP)-based target price of S$5.53 (which values YKA at P/E of 26x to allow for holding co discount),” say Ng and Ravi.

As at 2.05pm, shares in Wilmar are trading 6 cents higher, or 1.4% up, at $4.42, on September 24.