• As Wilmar’s FY19 results announcement draws near, we now expect the group to receive the CSRC approval post-results, and the valuation of its China unit should roll over, with FY19 as the base year.
• Amidst the COVID-19 outbreak, we do not expect demand for staples to be severely impacted. However, there could be some downward pressure on margins due to disruptions in the global supply chain.

Impact of COVID-19

• Wilmar International (SGX:F34) operates 350 plants in 65 locations in China, of which 9 are located in Wuhan. As at 9M19, 60% of revenue and PATMI were derived from China. According to the group, its China factories have resumed operations.
• Amidst the COVID-19 outbreak, we believe sales volumes for food staples will remain fairly resilient, but margin recovery from FY19 could be slower for the oilseeds & grains segment.
• We expect margins to face some pressure as the group sees rising logistics costs from disruptions in sea cargo flow caused by the virus outbreak.

Other Factors to Consider

• Soybean prices have declined 5% YTD. China has also reduced the tariff rate on soybeans to 27.5% from 30%. We believe the higher logistics costs could be alleviated if its input costs continue to trend down. On top of that, the group also has its own shipping arm, Raffles Shipping International Pte Ltd. This helps to improve the flexibility of Wilmar’s logistics operations.
• Higher transport costs incurred in the tropical oils and oilseeds & grains segments could be partially offset by gains in its shipping business, which is grouped under the company’s others segment.
• Overall, we trim FY20-21 earnings forecasts by 5% and 2%. Management does not expect any significant impact to its business for the time being.

We Expect the IPO of Wilmar’s China Unit, Yihai Kerry, to be Delayed

• Wilmar is expected to announce its FY19 results after trading hours on 20 Feb. We now expect the group to receive the China Securities Regulatory Commission (CSRC) approval post-FY19 results. This means the group has to resubmit its FY19 financials to the regulators for another round of review.
• That said, we believe CSRC could be tied up with stabilising the financial market amidst the virus epidemic in the near term. The valuation of Yihai Kerry is likely to be rolled-over, with FY19 as the base year.

Change in Target Price

• In view of the delays in the IPO, we now value the oilseeds & grains segment based on 20x blended FY19F-20F P/E (previous: 20x blended FY18-19F P/E).
• Target Price: SGD4.43

Source: RHB Invest Research - 14 Feb 2020