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Analysts mostly remain positive on Wilmar's business model after 'impressive' 1HFY2022 earnings

Maybank Securities has, however, downgraded its call to ‘hold’ as it sees limited catalysts for the counter.

Analysts are mostly positive on Wilmar International after the group posted record earnings of US$1.16 billion ($1.61 billion) for the 1HFY2022 ended June.

The higher earnings, which beat consensus’ estimates, were mainly attributable to the better performances across the group’s business segments except food products.

CGS-CIMB analysts Ivy Ng and Nagulan Ravi have kept “add” on Wilmar with an unchanged target price of $5.69.

“The record 1HFY2022 profit achievement, amid a period of record-high and volatile commodity prices, is another testament to the group’s strong integrated business and diversified business model,” the analysts write in their Aug 5 report.

“We consider [Wilmar’s] 1HFY2022 core net profit as above [our expectations], as it makes up 55% and 52% of our and consensus’ full-year projections,” they add.

On this, Ng and Ravi are expecting Wilmar’s earnings for the 2HFY2022 to be driven by higher tropical oils sales volumes and better food product margins, although this could be offset by the weaker earnings from its plantation segment.

During the 1HFY2022, Wilmar’s plantation and sugar milling segment were the key earnings driver thanks to higher crude palm oil (CPO) prices and better performances from sugar milling operations in India.

Based on Ng and Ravi’s estimates, Wilmar has an FY2022 P/E valuation of 10.6x and dividend yield of 4.2% at its current share price levels.

Citi analyst Jame Osman has also kept “buy” on Wilmar with an unchanged target price of $6.08 following its “impressive” earnings for the half-year period.

“[Wilmar’s] valuations look compelling, in our view, with the stock trading at FY2022 P/E of 9x; over 1 standard deviation (s.d.) below past 10-year mean of 14.2x; div. yield of [around] 4%,” he writes in his Aug 4 report.

In addition, the higher-than-expected earnings “underscores in our view the strength of the company's diversified model”.

“Investors have been perennially sceptical of Wilmar's earnings sustainability. Ahead, we believe the company's supply-chain advantages and significant global processing capacity provide it the agility to exploit market dislocations, as has been the case in the past,” he adds.

According to the analyst, Wilmar’s results were due to its upstream/midstream business performance coming in stronger than anticipated even as he expected that the impact of recent policy interventions in Indonesia and India would be contained.

The analyst adds that the group’s downstream performance was supported both by better consumer pack volumes (due to the lockdowns in China), from upward price revisions made to products, as well as sequentially better oilseed crush margins.

To this end, Osman continues to see Wilmar as a “beneficiary of the food inflation narrative and a recession hedge”.

He adds, “China's reopening remains a key catalyst given [Wilmar’s subsidiary] Yihai Kerry Arawana (YKA) has been a relatively weaker spot in the business despite the overall group's outperformance”.

In its note dated Aug 5, the team at DBS Group Research has kept its “buy” rating with the same target price of $6.67 as Wilmar’s earnings surpassed its expectations.

“Wilmar’s 2QFY2022 net profit expanded by 31.4% q-o-q to US$652 million (+111% y-o-y) as it successfully raised prices in food products division without losing sales volume,” the team writes. “Wilmar also navigates the commodities price volatility very well. 1HFY2022 earnings accounted for 61% of our FY2022 core net profit forecast of US$1.9 billion (+2.3% y-o-y).”

In the team’s view, the group’s positive earnings momentum will be sustained in the 2HFY2022.

“Wilmar’s integrated and diversified business model and the prudent risk management would enable the group to deliver good earnings amid commodities price, geopolitical volatility, and unusual weather conditions,” it writes.

“Wilmar is trading at [an] FY2023 P/E of 9.5x, -2 s.d. of its five-year average P/E multiple of 11.8x,” it adds. “We think investors have mispriced Wilmar as an upstream plantation company at this share price level, despite Wilmar’s well-integrated business platform that is consistently profitable even amid commodities price volatility.”

UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have, too, kept their “buy” calls on Wilmar with the same target price of $5.50 as Wilmar’s core net profit came in above their expectations.

As the analysts retain their earnings forecasts, they expect Wilmar’s 2HFY2022 earnings to “remain resilient” supported by greater sales volume and higher margin for its consumer products as well as higher contribution from sugar millings.

“We expect the palm upstream operation contribution to be lower as commodity prices have softened recently but still better y-o-y,” they write.

Unlike his peers, Maybank Securities analyst Thilan Wickramasinghe is less impressed with Wilmar’s prospects, as he downgrades the counter to “hold” from “buy”.

Wickramasinghe has also slashed Wilmar’s target price to $4.47 from $6.56 previously.

“We see limited catalysts for the stock to re-rate until better clarity on Chinese re-opening and global growth comes,” the analyst explains. “We have lowered the peer weighting in our blend to 10% (around 20%) given the massive discount Wilmar trades to its own listed parts elsewhere.”

He adds that among the agricultural counters listed on the Singapore Exchange (SGX), the analyst prefers Bumitama Agri (BAL) for its strong output outlook, valuations and yield.

Wilmar’s earnings for the 1HFY2022 stood in line with Wickramasinghe’s expectations.

“Growth was primarily driven by higher upstream palm oil prices, where downside risks to average selling prices (ASPs) are increasing. Concurrently, downstream demand and margin recovery may take longer in a backdrop of recession and prolonged Chinese lockdowns,” he writes.

In addition, the growth from Wilmar’s profit before tax (PBT) was driven by higher CPO prices, which is likely to moderate by 32% y-o-y in the FY2023.

“Even after such a price fall, CPO prices would still be higher than the past eight years (barring 2021). In the current inflationary backdrop this may drive demand destruction. We have lowered FY2022-FY2024 segment volumes by 21%-27%,” adds Wickramasinghe.

Shares in Wilmar closed 21 cents lower or 4.88% down at $4.09 on Aug 8.

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