• Wilmar International (SGX:F34) is expected to see marginal impact from the Covid-19 epidemic as demand for consumer packs is stronger and will mitigate the lower sales volume from the bulk segment.
• 2020 outlook remains positive on the back of a better palm oil outlook and higher margins for the oilseed and grains segment. The sugar segment is expected to perform better in 2020 on higher sugar prices.
• The proposed YKA IPO is slightly behind schedule but this is not a concern.

Impact From COVID-19

• The operational impact arising from COVID-19 epidemic is as follows:
  1. Delay of Yihai Keery Arawana (YKA) listing. The approval process has been delayed, given COVID-19. The listing is likely to be in 2H20 (probably in 3Q20). Based on unaudited numbers, YKA’s 2019 financial performance was better than in 2018. The China business accounted for about 60% of the group’s profit in 2019 vs 57.2% of 2018.
  2. 90% of Wilmar’s plants in China are back in operation amid high household demand and regulators trying their best to ensure that the cities are well supplied on essential staples. Management guided that Wilmar International would beef up production.
  3. Sales of bulk products slowing down, given less eating out at restaurant, and could take a longer time to recover. Management said sales of bulk products may take a longer time to recover even after the spread of COVID-19 is under control. This will affect sales of bulk cooking oil which is mainly sold to restaurants and cafés.
  4. Better demand for consumer packs which command better margins and will mitigate impact from weaker bulk sales. Sales of consumer pack cooking oil, rice, noodles and flour are increasing. Wilmar International’s consumer pack products focus on premium branding and command higher margins than bulk. Thus, the higher consumer pack sales will mitigate weak sales of bulk products. Both product lines are classified under the kitchen food division of YKA which contribute 70-75% of YKA’s PBT.

Stock Impact

2020 outlook.

• Management is optimistic on the outlook for the three segments in 2020 on the back of:
  1. a stronger business model amid the coronavirus epidemic;
  2. B30 biodiesel programme in Indonesia and lower production supporting better palm oil prices in 2020; and
  3. higher demand for consumer staples.
• The sugar segment is expected to turn better in 2020 with higher sugar prices and better performance from processing & merchandising. Management also guided that the sugar refining margin has started to improve in 2020

Relatively stable operation for oilseed and grains segment.

• The oilseed and grains segment did well in 2019 amid weak animal feed demand due to the African Swine Fever (ASF) outbreak. The live hog inventory in China had dropped by 28% y-o-y as at Nov 19, the swine herd recovery has been slower than expected and it might take 3-4 years to reach pre-ASF levels.
• Having said that, manufacturing sales volume for this segment dipped only 2.5% y-o-y in 2019. Hence, we reckon Wilmar International is no longer dependent on soybean crushing. Besides, management expects capacity of rice and flour will increase to 25m tonnes (currently: 8m-9m tonnes) in about 2-3 years’ time. Hence, margins are expected to improve on the back of economies of scale.

China palm oil demand.

• Management commented that the recent fall in palm oil prices is due to lower demand and consumption in China. The higher China palm oil demand in 2019 was mainly due to:
  1. the reduction in hog population leading to lower soybean crushing;
  2. lower palm oil prices; and
  3. stringent rules for the import of canola oil from Canada.
• Management thinks the strong demand might not sustain in 2020 due to lower hotel, restaurant and café demand (accounting for 30% of China’s palm oil usage) amid COVID-19. We opine palm oil prices in this cycle has peaked and should trade at RM2,400-2,800/tonne before production starts to normalise by late-3Q20 or 4Q20.

Earnings Revision

• We reduce our 2020 core net profit forecast by 6% to factor in lower sales volume and PBT margin from oilseeds & grains amid COVID-19 in China. We now expect flat y-o-y growth in 2020 (7.3% previously).
• Upside potential - Our forecasts are conservative and upside could come from much better consumer packs sales in China and better market positioning in the tropical oil segment.
• Maintain BUY with a lower target price post earnings adjustment. Our target price of $4.60 is based on 2020F EPS and reflects a blended 23x 2020F PE for China operations and blended 11x PE for non-China operations.

Share Price Catalyst

• 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 International as well. Post listing of YKA, we expect Wilmar International 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 2x PE multiple increase for YKA’s food products will add S$0.20 to our target price.

Source: UOB Kay Hian Research - 24 Feb 2020