• Reiterate BUY and SGD4.75 Target Price, 16% upside and 3% yield.
• Wilmar International (SGX:F34) is one of our 2020 Top Picks, as we expect its share price to continue to re-rate upon the IPO of its China subsidiary, Yihai Kerry, on the Shenzhen Stock Exchange.
• Operations-wise, we expect performances from the tropical oils segment to remain strong on increasing demand and tighter supply. Whilst the oilseeds & grains segment should still see some negative impact from African Swine Fever (ASF), it should also see y-o-y improvement due to 1H19’s low base effect.

China IPO Still a Key Driver to Share Price

• Wilmar International has responded to the first set of queries sent by the China Securities Regulatory Commission and is now waiting for the approval or follow-up questions. If all goes well, management is targeting for the listing to happen in 3-4 months’ time.
• Wilmar International is also aiming at a valuation close to the IPO valuation cap of 23x. We believe the IPO will do well, due to Wilmar International’s strong brand name in China. Hence, we expect further share price re-rating once Yihai Kerry is listed.

Tropical Oils Segment to Do Well in 2020

• We expect to see a continued strong performance in the tropical oils segment in 1H20, as Wilmar International’s plantation unit will gain from the hike in CPO prices. The timely purchase of raw materials aside, we think processing margins will still be decent, even with a rising CPO price, as demand growth from food and biodiesel outstrip supply. China’s usage of palm oil is also likely to rise due to the shortage of soy oil as a result of the ASF.
• On the biodiesel side, we believe the implementation of Indonesia’s B30 mandate will be successful – this is due to the availability of subsidies in the Biodiesel Fund and the IDR6,000/litre fine for non-compliance. The higher mandates from Indonesia and Malaysia should offset the decline in discretionary demand.

Oilseeds & Grains to Do Better

• As at end-November, average pork prices in China stood at CNY51/kg – while it has come off from the peak in August, it is still 130% higher y-o-y. At this price, it is still very profitable for hog farmers to expand their inventory even if the risk of ASF still persists. This should bode well for Wilmar’s crushing division. y-o-y, the oilseeds & grains segment should do better in 2020 due to the low base effect in 1H19.
• We value Wilmar International based on SOP valuation.
• Key risks: Deterioration of IPO prospects, ASF worsens, and weaker-than-expected demand growth for palm oil.

Source: RHB Invest Research - 19 Dec 2019