• Wilmar (SGX:F34)'s 1H20 results came in ahead of expectations. Core PATMI of USD635m (+49% y-o-y) accounted for 53% of Street full year estimates. All segments delivered stronger numbers, with China driving most of the growth.
• A higher interim dividend of 4 SG cents was declared in line with better profits.
• We believe Wilmar's share price would remain supported, with the China IPO imminent. Management also remains positive on 2H20 outlook.
• Maintain BUY and Target Price of SGD5.45, 16% upside and 3% yield.

Key Drivers of 1H20 Growth

• The surge in Wilmar's 1H20 core PATMI was largely driven by a turnaround of China’s oilseeds crushing from 1H19’s low base. 1H20 pretax profit for the Feed and Industrial Products segment jumped > 100% to USD370m on strong crush margin and volume in China as demand recovered from the African Swine Fever (ASF) outbreak, which resulted in negative crush margin and low demand of feed meal in 1H19.
• Food products also delivered 21% y-o-y growth in pretax profit to USD495m, led by strong demand for consumer pack products in 1H20 as various countries implemented lockdowns and movement restrictions to curb the COVID-19 contagion.
• Consumer pack volume soared 40% y-o-y for the period. This, together with the stronger margin of consumer pack was able to offset the 9% decline in sales volumes for medium and bulk packs from the hotel, restaurant and catering (HORECA) industry.

Plantation and Sugar Milling Recorded a Loss of USD83m

• Plantation and sugar milling recorded a loss of USD83m, a 20% y-o-y improvement from 1H19’s loss of USD104m. The loss was largely attributed to the non-harvesting season in Australia and a USD20m impairment on Shree Renuka sugar milling assets in 1H20, while partially mitigated by better performance from its palm oil plantations on the back of stronger CPO prices.

Contribution of JV and Associates Also Doubled to USD84m

• Contribution of JV and associates also doubled to USD84m on stronger contributions from the group’s investments in China, India and Africa.

2H20 Outlook Still Fairly Optimistic

• We note that China is still recovering from the ASF outbreak. Its hog inventory is 80% compared to end-2017 levels. We believe the shortage of hog inventory will continue to provide structural support for crush margins over the next year.
• As China (60% of Wilmar’s PATMI contribution) recovers from the COVID-19 pandemic, we expect consumer pack demand to gradually taper down in the absence of strict movement restrictions but this should be partially offset by an improvement in the HORECA industry. Rising CPO prices are also likely to help boost earnings from the plantation sector.

Source: RHB Invest Research - 12 Aug 2020