UOB Kay Hian maintains Wilmar's TP at $6 ahead of FY2021 earnings

The counter’s share price performance remains lacklustre due to the concerns over China’s weak economy and Covid-19 restrictions

UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow have kept “buy” on Wilmar International ahead of the agri-giant’s results for the 2HFY2021 and FY2021 ended Dec 31, 2021, with a target price maintained at $6.

For the 4QFY2021, Leow and Yow say they estimate Wilmar to report a core net profit of US$380 million to US$400 million ($512.5 million to $539.5 million), driven by strong performances from Wilmar’s palm and sugar operations, offsetting the weaker contribution from China.

“The plantation and sugar milling division, which is the upstream operation for Wilmar, is expected to see significant earnings increase y-o-y and h-o-h in 2HFY2022,” write the analysts in a Jan 19 report. The analysts have also noted that while the division contributed about 13% of Wilmar’s 1HFY2021 profit before tax (PBT), it is expected to increase to 22%-25% of 2HFY2021 PBT on the back of strong selling prices.

“Crude palm oil (CPO) and sugar price increased by 35% and 26% y-o-y respectively in 2021. 2021 is likely to best earnings year for this division since 2016,” they add.

The sales volume for food products, which is still facing stiff margin pressure on the back of high raw material costs, is likely to improve y-o-y for the 4QFY2021, note the analysts. This is due to the Chinese New Year holidays falling at the beginning of February compared to the holidays taking place in mid-February in 2021. The earlier holiday season is likely to lead to festive sales being front-loaded into the last quarter of the FY, they add.

The feed and industrial products division could see better contribution in 2HFY2021 y-o-y, with tropical oils likely to be able to “compensate for the weakness from its oilseeds and grains”.

Crushing margins and crushed volume also saw improvement in the 4QFY2021 compared to the 2QFY2021 and 3QFY2021 with the recovery of pork prices and higher demand for animal feed.

As the world’s largest palm-base biodiesel producer with an installed capacity of 4 million tonnes as at end-2020 and the largest biodiesel supplier to Indonesia, Wilmar is facing a lower biodiesel allocation as more capacities have come onstream in the past few years.

“For 2022, the allocation to Wilmar has been reduced by 15% to 2.71 million kl vs 3.19 million kl allocated in 2021. We do not view this as a concern as the capacity expansion is in tandem with Indonesia’s biodiesel roadmap, and the mandate is expected to increase to 40% (B40) from 30% now, which will increase the usage of biodiesel by at least another 3 million kl or 2.6 million tonnes,” write the analysts.

Earnings estimates

To this end, the analysts are estimating that Wilmar report a core net profit of US$956 million to US$976 million for the 2HFY2021, compared to the US$851 million reported in the 2HFY2020.

They have also kept their earnings forecast for the FY2021, FY2022 and FY2023 at US$1.71 billion, US$1.79 billion and US$1.96 billion respectively.

Despite the buoyant forecast, Leow and Yow have lowered their target price estimate on Wilmar to $6 from $6.40 previously as the group’s share price remains lacklustre on the back of concerns of China’s weak economy and Covid-19 restrictions, which have dampened domestic consumption.

“[Our] fair value is derived from sum of the parts (SOTP) by pegging an FY2022 price-to-earnings ratio (P/E) of 19 times for China operations and a blended 11 times P/E for non-China operations,” write the analysts.

That said, they remain positive on Wilmar for its “diversified and integrated business model which has delivered good results performance despite the global uncertainty in 2020 and 2021 amid the Covid-19 pandemic,” they add.

Shares in Wilmar closed 5 cents higher or 1.17% up at $4.34 on Jan 20, with an FY2021 P/B of 1.0 times and dividend yield of 3.4%.

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