SINGAPORE (July 2): DBS Group Research continues to rate Wilmar International a “buy” and back to its target price of $4.60, as in its previous report on Wilmar, DBS cut its $4.60 target price to $4.00.

See: Wilmar offers margin of safety amid rough seas: DBS

In a Wednesday report, analyst William Simadiputra says, “We raise Wilmar’s target price to $4.60 on higher FY20 price-to-earnings (PE) multiple of 22x pegged to Yihai Kerry Arawana (YKA)’s earnings forecasts of US$650 million for 2020. This implies that YKA may potentially be listed at a market capitalisation of around $19.7 billion, or equal to 75% Wilmar’s current market capitalisation.”

With YKA’s listing possibly above the analyst’s PE multiple, this implies that Wilmar’s current valuation is still closely associated with commodities (especially palm oil), discounting the value of its strong presence in the branded food product segment.

“Our higher YKA’s valuation is based on our view that YKA’s upcoming IPO will gain strong interest among the investors,” adds Simadiputra.

Meanwhile, Wilmar also deserves the credit for YKA’s listing as it will be self-funded going forward. This may increase free cash flow on Wilmar’s ex-YKA entities and potentially increase dividend payout for shareholders.

“Furthermore, commodity prices is not expected to rise sharply in 2021. Hence, an integrated player such as Wilmar is well positioned to capture margins arising from steady demand from the consumers, with reasonable input cost,” adds Simadiputra.

It was also noted in DBS’ previous report that its food-based business model is able to withstand Covid-19 and that the growing contribution from the company’s consumer branded products in the food market segment will provide a cushion for its earnings amid volatile commodity prices.

Hence, the analyst believes that Wilmar’s upcoming 2Q20 earnings performance will be its next share price driver, as the company will likely benefit from the resumption of non-household food consumption, as well as the steady demand from the kitchen food segment.

However, higher palm oil prices in May-June may cap prospects of margin expansion in the tropical oil related businesses.

“Going forward, we believe that Wilmar will sustain its positive earnings momentum and capitalise on the reopening of major economies such as India and China. This will improve demand recovery for non-household food. Maintaining good earnings momentum is crucial to sustain strong interest in its China listing in 2H20 and retain Wilmar’s potential re-rating story,” says the analyst.

As at 12.35pm, shares in Wilmar are trading at $4.13 or 1.1 times FY20 book with a dividend yield of 2.6%.