Wilmar is RHB’s top plantation pick on China IPO despite dull downstream action ahead

SINGAPORE (Jan 10): RHB Research is keeping Wilmar International as its “top pick” for exposure to the plantation sector despite an unexciting year ahead for CPO prices.

“We believe Wilmar will outperform the sector as its exposure to the downstream space could help to mitigate the lower earnings in the plantation segment,” says analyst Juliana Cai in a Thursday report.

In addition, the potential A-share listing of its China operations could unlock some latent value in the stock through special dividends and a share price rerating, adds the analyst.

“Maintain ‘buy’ and $3.58 target price, 13% upside, with 3% FY19F yield,” says Cai.

Wilmar currently derives 50% of its revenue from China. Since the acquisition of Kuok Group’s oils & grains business in 2007, the company has grown rapidly in China, with a revenue CAGR of 10%.

At present, the group is the largest edible oil refiner, rice and flour miller, and specialty fats cum oleochemicals manufacturer in China. It is also a leading oilseed crusher, and has the largest market share for China’s branded consumer pack oils, rice and flour.

Unofficially, valuation of A-shares IPO is capped at 23x historical P/E. Assuming Wilmar floats 10% of its China operations at 20x FY18F P/E, the group is expected to raise US$1.3 billion ($1.8 billion).

“If 40% of the proceeds are paid out to investors, this will translate to a special dividend of 11 cents per share,” says Cai.

At 20x FY18F P/E, RHB estimates the China entity could be listed with a total market capitalisation of $12.8 billion or 87% of Wilmar’s current market cap.

Using a SOP valuation, Wilmar’s stock could be worth $4.37 after a rerating, implying 37% upside from the current level, adds Cai.

Elsewhere outside China, exposure in downstream palm products should mitigate unexciting CPO prices this year.

For instance, rising biodiesel mandates in Malaysia and Indonesia should also benefit Wilmar.

Since biodiesel has higher margins, Cai believes this could help mitigate the effect of soft CPO prices. However, low crude oil prices may reduce demand for discretionary blending.

As at 11.21am, shares in Wilmar are trading at $3.22, 2 cents lower compared to its Jan 10 2018.