Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


Wilmar International 2Q22 Preview - Uneventful Quarter; Look Forward to Better 2H22

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  • Wilmar International is scheduled to release its 1H22 financial results on 4 Aug 22 after market close.
  • For 2Q22, we are expecting core net profit of US$300m-330m or 1H22 core net profit of US$628m-658m (1H21: US$732m).
  • 1H22 earnings will be mainly supported by palm and sugar operations, while operations in China should be able to turn around in 2H22. The recent agri commodity price correction will translate into better margins for the food product segment in 4Q22.
  • Maintain BUY.

1H22 Preview of Wilmar's Earnings

  • Wilmar International (SGX:F34) is scheduled to release 1H22 financials on 4 Aug 22 after market close. ( For 2Q22, we are expecting core net profit to be within the range of US$300m-330m (2Q21: US$309m; 1Q22: US$328m). Added to 1Q22 core profit, 1H22 core net profit is expected to be within US$628m-658m (vs 1H21: US$732m).
  • 2Q usually a quieter quarter. Overall sales volume is usually weaker in 2Q among the four quarters. For 2Q22, the sales volume could be lower y-o-y due to the weaker sales for tropical oils and sugar merchandising. High palm oil and sugar prices would be the main supports to 2Q22 earnings, compensating the weaker sales volume.

Palm Product Sales Disrupted by Indonesia’s Export Control

  • Despite lower sales volume, we are still expecting the tropical oil division to deliver better earnings in 2Q22 and 1H22 would be significantly higher y-o-y than 1H21. The main earnings driver will come from higher ASP for palm products and better margins from its Malaysia downstream and those palm products not under the exports ban list.
  • To recap, Indonesia’s president announced an export ban on four major palm products effective 27 Apr 22 and this lasted about a month. Although the export ban was lifted effective 23 May 22, exports from Indonesia were still very slow due to unclear export regulations and changes to export levy and duty. This led to our expectation of lower sales volume for the tropical oil division in 2Q22.

Sugar Milling Season Started But Large Contributions to Come in 2H22

  • Australia has completed sugar harvesting with milling starting towards end-2Q22. Good weather during the growing season will likely lead to higher sugar production and sales volume, and with high sugar prices, Wilmar’s sugar milling division is likely to see a strong contribution in 2H22.

China Operation May See Some Q-o-q Improvement in 2Q22 But Still Lower Y-o-y

  • Yihai Kerry Arawana (YKA)’s earnings are likely to be better q-o-q but significantly down y-o-y due to margin pressure. 1H22 earnings should still be significantly lower y-o-y due to the sharp drop in 1Q22, which cannot be made up by its 2Q22 performance.
  • We expect better 2Q22 contributions from:
    • Higher sales volume and marginal margin improvement q-o-q. Higher consumer pack sales as household usage increases during the major cities’ lockdown compensated for the weaker sales for medium pack and bulk. In addition, selling price adjustments to consumer products will also help to ease the margin pressure marginally.
    • Oilseeds and grain will be supportive in 2Q22. Beside the improvement from consumer products in China, soybean crushing should also perform better q-o-q. Contributions from rice and flour remain steady (but with seasonally lower sales), while soybean crushing should see improvement on the back of higher crush volume and margins.
    • China soybean crushing volume picked up significantly in 2Q22 vs 1Q22 with the arrival of soybeans from Brazil. With higher utilisation rates and better animal feed sales, we should see better contributions from the oilseeds & grain division in 2Q22 to compensate for the weakness in 1Q22.

Recent Weakness in Agri Commodity Prices Will Translate to Higher Margins in 4Q22

  • We are expecting higher sales volume to come in 2H22, supported by festive demand. We are also expecting better profit margins. The pressure on profit margin on the consumer pack business should ease with the recent sharp price correction in almost all of Wilmar’s feedstock, although its palm upstream operation could see lower contributions.

Maintain Earnings Forecasts for Wilmar

  • We are maintaining our earnings forecasts. Our current net profit forecast for Wilmar is at US$1.77b, US$1.82b and US$2.0b for 2022, 2023 and 2024 respectively.
  • Maintain BUY rating on Wilmar with target price of S$5.50. Our target price for Wilmar is derived using the SOTP-based valuation by pegging a 2022F P/E of 17x for the China operations and a blended 11x P/E for the non-China operations. The fair value of S$5.50 translates to a blended 2023F P/E of 15.3x.
  • Catalysts:
    • Stronger recovery in China operations.
    • Surprise margin upside from the good timing in sourcing of raw materials.

Source: UOB Kay Hian Research - 15 Jul 2022

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