• We upgrade Wilmar's target price to S$4.75 after rolling over our valuation to 2020 EPS. 9M19 earnings beat consensus estimates and led to a consensus earnings upgrade. The earnings momentum will continue into 2020 with 12% y-o-y net core profit growth.
• Tropical oils may see weaker margins as feedstock prices increase, but this would be offset by a better performance from the oilseeds & grains segment.
• Maintain BUY. Target price: S$4.75 (previous: S$4.40).

What’s New

Best performing year since 2009.

• Ytd, Wilmar's share price has risen by about 35.7%. This is the best performing year since 2009. The listing of its China operation under Yihai Kerry Arawana (YKA) is not the sole factor that contributed to the performance; the good earnings for 9M19 also came as a surprise to the market and led to earnings upgrades.

2020 performance to be driven by oilseeds & grains.

• We expect 12% net profit growth for 2020 with bulk of the growth to come from oilseeds & grains. 2020 will see the return of this division as the main earnings contributor (43% of 2020F PBT vs 34% of 2019F PBT). The earnings growth will be driven mainly by better margins and expected higher sales volume from recovery of soymeal demand and growth from rice & flour.
• China’s demand for soymeal is expected to increase y-o-y as the hog population is expected to recover from its low in 2019. As highlighted by Bloomberg recently, China plans to reinvigorate its own hog production, and aims to increase domestic supply to 80% of normal levels by the end of 2020, according to Yang Zhenhai, head of the Animal Husbandry Bureau at the Ministry of Agriculture and Rural Affairs (report published 28 Nov 19).
• Tropical oil’s contribution is expected to decline on the back of lower margins due to a surge in feedstock prices. Good risk management will help to mitigate the impact.

YKA IPO on track for 1Q20.

• Based on the update from the 3Q19 results briefing, management has guided that the listing of YKA likely to take place in 1Q20. Although this is a slight delay as compared with our earlier expectation of early-Dec 19, it should not be a concern.
• Based on YKA’s financial summary disclosed in Jul 19, 2018 PATAMI was Rmb5,128m or US$732m (US$1:Rmb7). Based on our estimates, 2019 YKA contribution is likely to be around US$670m-690m, which is not substantially lower y-o-y. Furthermore, we expect better earnings from China in 2020 with the recovery of soybean crushing margins on the back of better soymeal demand.

Stock Impact

Tropical oils performance likely to be dragged down by weaker margins.

• PBT contribution from tropical oil is expected to drop to 40% of 2020F PBT from 46% of 2019F PBT. We are expecting marginal increase in sales volume, given that palm oil supplies from Indonesia and Malaysia are likely to be tighter than 2019.
• Downstream margins for 1H20 would be challenged because the increment in refined product prices is lagging behind the surge in CPO prices. For example, palm olein exports price on 5 Dec 19 reported by MPOB went up by 27% from 31 Sep 19, vs 34% increase in CPO price.

Beneficiary of higher biodiesel mandate in Indonesia.

• Wilmar International (SGX:F34) is the largest palm-base biodiesel producer in Indonesia (and globally as well). Hence, the 2020 B30 mandated biodiesel volume allocated to Wilmar has increased by 40.5% to 3.09m kl from 2.20m kl (inclusive of the additional allocation for B30 trial run for Nov and Dec 19). The biodiesel sales volume is expected to contribute approx. 10% of Wilmar’s 2020 tropical oil sales volume, which is up from ~7% for 2019F.

China business goes far beyond soybean crushing.

• In our previous note dated 14 Nov 19, we highlighted that Wilmar’s oilseeds & grains operation is no longer solely concentrating on soybean crushing. Making reference to the three charts in attached PDF report, China’s soymeal demand declined by 6.3% y-o-y for the period of Oct 18/Sep 19 and Wilmar’s soybean crushed volume for 9M19 based on market data was down by 28% y-o-y.
• Compared with the 28% decline in soybean crushing volume, Wilmar’s 9M19 oilseeds & grains manufacturing sales volume declined by 2.1% y-o-y only. This clearly shows that Wilmar is no longer highly dependent on soybean crushing, and that its rice and flour sales volume are growing faster to compensate for the decline in sales of soymeal.

Earnings Revision / Risk

• No change to our earnings estimates. We forecast core net profits of US$1,205m, US$1,348m and US$1,443m for 2019-21 respectively.

Valuation / Recommendation

• Maintain BUY and with higher target price of S$4.75 (previous: S$4.40), as we roll over valuation to 2020F PE and reflects a blended 23x 2019F PE for China operations and blended 11x PE for non-China operations.

Share Price Catalyst

Good 4Q19 results announcement.

• 4Q19 results will be driven by strong consumer products performance given an earlier Chinese New Year for 2020 and better oilseeds crush margins.

Share price re-rating from listing of YKA.

• With its strong market positioning and branding in China, we expect YKA’s share price to perform well upon listing. This could lift trading sentiment on Wilmar as well. Post listing of YKA, we expect Wilmar to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.
• Our current SOTP valuation is based on 2020 earnings. Every increase in multiple by 2 (eg from 26x to 28x) in PE for YKA’s food products will add S$0.20 to our target price.

Source: UOB Kay Hian Research - 10 Dec 2019