Wilmar International is getting one step closer to a spinoff for its China unit. That could unlock shareholder value for investors. Should you take the plunge?
Why invest in Wilmar?
Wilmar’s China unit Yihai Kerry Arawana Holdings Co (Yihai Kerry) has completed the guidance process stipulated by the China Securities Regulatory Commission (CSRC) – a process that typically takes up to 9 months but was completed in 3 months – keeping it on target to an A-shares listing by 4Q2019. Its next step involves submitting the listing application and filing its draft prospectus this month. The official listing date would be confirmed once CSRC grants its approval.
How big is Wilmar in China?
At present, Yihai Kerry’s operations contributes over 50% to Wilmar’s group earnings in FY2018.
UOB Kay Hian’s Leow Huey Chuen says Yihai Kerry’s listing could make it “one of the largest listed vegetable oil and food ingredient producers by market capitalisation” on China’s A-share market. It is estimated to be valued between US$12b to US$13b at IPO.
Leow also points out that Wilmar’s ARAWANA brand is a “well-known premium household brand in China”, both in cooking oil as well as consumer pack rice, flour and dry noodles. As it stands, Wilmar is the top producer of consumer pack edible oils in China with a 45% market share. What’s more, Wilmar’s 33% owned associate company, Luhua, is also the top peanut oil producer in China.
What happens after the listing?
Upon listing, Wilmar China could trade at a higher valuation than peers, given its strong market positioning in the oilseeds & grains processing segment, according to UOB Kay Hian’s Leow.
Yihai Kerry’s IPO proceeds would be put towards the expansion of its soybean crushing, wheat flour and rice milling capacities in China, estimated to be around US$1.2b to US$1.3b.
With the majority of Wilmar’s expected capital expenditure funded by the IPO proceeds, that could potentially free up Wilmar’s cash flow to declare special dividends to Wilmar’s shareholders.
Cheryl Lee, analyst from UBS, expects to see a significant upside from the spinoff. “The maximum allowed listing multiple of 23x earnings is significantly higher than Wilmar’s own 5-year average P/E of 12x should the IPO occur.” In addition, Lee estimates that Wilmar could propose a special dividend with a yield of 4%.
Wilmar target price
UBS has raised its price target to $4.50. UOB Kay Hian maintains its buy recommendation and price target for Wilmar at $3.90, with a forecasted EPS of 22.3 US cents for FY2020.
(By Gwyneth Yeo)