• Maintain BUY and SGD3.58 Target Price, 13% upside, with 3% FY19F yield.
• Wilmar is our Top Pick for exposure to the plantation sector. Given 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. 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.

Wilmar in China

• WILMAR INTERNATIONAL LIMITED (SGX:F34) 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%. Today, in China, it is the largest edible oil refiner, rice and flour miller, and specialty fats cum oleochemicals manufacturer.
• It is also a leading oilseed crusher, and has the largest market share for China’s branded consumer pack oils, rice and flour.

Special Dividends From China IPO

• In mid-2017, Wilmar made known its intention to list its China operations on the Shanghai Stock Exchange. Internal restructuring of the operations has been largely completed. The proposed listing is expected to take place by the end of 2019.

Potential special dividend after China IPO.

• Wilmar generates at least USD2bn of EBITDA each year and spends USD1bn on capex. We believe the group should at least distribute part of the IPO proceeds as special dividends, since it does not need additional capital to support current operations.
• We estimate 50% of the group’s PATMI is derived from China, in line with its revenue breakdown. Since the IPOs in China have an unwritten valuation cap of 23x historical P/E, we could expect it to raise USD1.3bn in IPO proceeds – if it floats 10% of its China operations at a more-conservative valuation of 20x FY18F P/E.

Base case scenario leads to SGD0.11 special dividend.

• In our base case scenario, we expect Wilmar to pay out 40% of the IPO proceeds, in line with FY17 dividend payout ratio. This would result in a special dividend of SGD0.11, boosting dividend yield by another 3.5ppt. Refer to the PDF report attached for the breakdown on the base case scenario.
• Refer also to the PDF report attached for the details on our best case scenario with derivation of SGD0.25 special dividend.

Unlocking Latent Value With China IPO

Potential rerating of Wilmar’s share price after China IPO.

• Should Wilmar’s China operations be listed at 20x FY18F P/E, we estimate the China-listed entity could be worth a total market capitalisation of USD12.8bn, which is very substantial vs its current market capitalisation of USD14.7bn. Hence, despite dilution from the IPO, we estimate the new SOP valuation of Wilmar could derive a higher intrinsic value of SGD4.37 per share, which implies 37% upside from current levels. Refer to the PDF report attached for the breakdown of SOP valuations.
• In addition, based on Bloomberg Industry Classification Systems (BICS), consumer products companies listed in China trade at an average of 61x current P/E, and those with research coverage trade at an average forward P/E of 25x. At 25x FY18F P/E, the market cap of the China-listed entity would be worth USD16bn. Therefore, there is a further potential for the valuation of its China-listed entity to run up after its IPO, and to even exceed Wilmar’s current market cap.

Outside of China, exposure in downstream palm products should mitigate unexciting CPO prices.

• The rising biodiesel mandates in Malaysia and Indonesia should benefit Wilmar, as it is the largest biodiesel producer in both countries. Since biodiesel has higher margins, we believe this could help mitigate the effect of soft CPO prices. However, low crude oil prices may reduce demand for discretionary blending.

Source: RHB Invest Research - 10 Jan 2019