• We expect WILMAR INTERNATIONAL (SGX:F34) to benefit from higher CPO prices and improved demand for soybean meal and consumer products in the short term.
• Meanwhile, upside potential lies in the IPO performance of its China subsidiary, Yihai Kerry, on the Shenzhen Stock Exchange. Management expects the IPO to take place in 1H20.
• Maintain BUY with unchanged target price, 11% upside and 2.5% yield.
• Wilmar International is one of our 2020 Top Picks.

China IPO Is the Focus

• Wilmar International is currently awaiting regulatory approval on the China listing. A key concern is that delays in approval would shift the IPO valuation base year to FY19, which experienced weaker earnings in the oilseeds & grains segment. However, we do not see this as a major cause for concern for the following reasons:
  • 4Q19 could play catch-up and narrow the earnings difference between FY18 and FY19. Yihai Kerry recorded a PATMI of USD740m in 2018. According to management, 60% of Wilmar International’s 9M19 PATMI (c.USD508m) was derived from its China unit. Given that the Lunar New Year comes earlier on 25 Jan 2020, we believe 4Q19 would be a stronger quarter due to the festive season, thereby narrowing the gap between FY18-19 earnings.
  • We expect positive performance from Yihai Kerry’s shares post-listing due to its strong product brand name in China. Its edible oil, rice and flour products all have leading market shares in China. China food manufacturers trade at an average FY20F P/E of 28x. We believe Yihai Kerry’s valuation could at least re-rate to this multiple post-listing.

Strong Performance in the Tropical Oils Segment in the Near Term

• CPO prices have risen above MYR3k (+50% y-o-y). We expect Wilmar International’s plantation unit to do well. This would help to offset the weaker midstream refining segment. On the biodiesel end, the price gap between CPO and gasoil (POGO) is now in negative territory of -USD143/tonne. However, we believe the utilisation rate would be maintained on the back of Indonesia’s B30 mandate and availability of subsidies in the Biodiesel Fund.

Oilseeds & Grains to Do Better

• Average pork prices in China remained high at CNY51/kg at end-December (+115% y-o-y). While we think pork prices could ease after the Lunar New Year, we believe the pork shortage issue in China would sustain for a couple of years due to African Swine Fever (ASF).
• The rising need for soybean meal to grow the pig inventory and other protein substitutes should bode well for Wilmar International’s crushing division in the medium term.
• Key risks: Deterioration of IPO prospects, ASF worsening, and weaker-than-mand growth for palm oil.
• WILMAR INTERNATIONAL (SGX:F34) is one of the RHB's 2020 Top Singapore Stock Picks.

Source: RHB Invest Research - 9 Jan 2020