• Re-iterate BUY on Wilmar International (SGX:F34) despite the recent setback from the unexpected placement by Archer Daniels Midland (ADM) and the final approval for Yihai Kerry Arawana (YKA) listing taking longer than expected. Investors should focus on the potential value creation from YKA listing as well as a potential special dividend.
• Beyond YKA’s listing, the strong 1H20 earnings have led to a 10% consensus earnings upgrade, and Wilmar could potentially outperform consensus again on better-than-expected margins.
• Maintain BUY on Wilmar with a higher target price of S$5.35.

Recent Wilmar Share Price Weakness Not Justified

• Since the placement by Archer Daniels Midland (ADM), Wilmar's share price has weakened by 15% which we believe is due to:
  1. concern over share overhang from the placement of 170.5m shares at S$4.40 by ADM and issuance of convertible bonds into Wilmar shares at S$5.60 (US$4.11); and
  2. final regulatory approval for Yihai Kerry Arawana’s (YKA) listing taking a longer time than expected, which has raised concerns of further delays or even being rejected.

Potential Strong Debut From YKA Listing and Good Earnings Could Overcome the Overhang Concern

• The share placement by ADM may lead to short-term overhang on Wilmar’s shares, but we remain positive on Wilmar and foresee strong catalysts for Wilmar's share price from the planned listing of YKA and expected strong 2H20 earnings performance.
• The first batch of 18 companies under the ChiNext registration system was listed on 24 Aug 20, with an average issuing PE of 39.3x. On the first day of listing, share prices of these companies surged 43-1,061% from their issue prices.
• In addition, Wilmar's 1H20 core net profit was better than consensus and led to a 10% consensus earnings upgrade. Our revised earnings estimate is about 9% above consensus, and we foresee more earnings upgrade once Wilmar announces its 3Q20 financial metrics in early-Nov 20.

Listing of YKA Is on Track Despite Final Approval Taking a Longer-than-expected Time

• Despite the listing process of YKA taking a longer-than-expected time, the listing date is drawing close, and the final approval from China Securities Regulatory Commission (CSRC) could come anytime soon. In addition, we do not foresee any risk of the listing being rejected or aborted.
• The YKA listing is a value unlocking exercise for Wilmar and could reward shareholders with better dividend payouts in the future as YKA will no longer need to draw on Wilmar’s balance sheet to fund its aggressive expansion.
• During the recent briefing, management mentioned that investment in China over the next 3- 5 years would be larger than the investment in China over the last 30 years.

Wilmar's 2H20 Performance

• Wilmar’s 1H20 core net profit of US$635.9m accounted for about 47% of our full-year core net profit estimates of US$1.35b, which implies that 2H20 core net profit is expected to come in at US$715m-720m vs 2H19’s US$829.3m. Despite our recent earnings upwards revision, 2H20 earnings could come in better again given the recent spike in oilseeds and vegoil prices.
• Prices of soybean, soymeal and soyoil have strengthened recently as the dry weather in the US and South America is likely to reduce the upcoming soybean supply. Based on our channel check, Wilmar would have secured the required feedstocks for its midstream processing and downstream requirements earlier before this spike. Thus, we could potentially see much better processing margins in 4Q20 and this could continue into 1Q21.

YKA’s Strong Market Presence in China Consumer Staple Is Undisputable

• Wilmar through YKA has continued its aggressive expansion plan by increasing more production capacities, exploring new locations, expanding marketing & distribution network and horizontal products expansion to supply more raw materials to its existing clientele in China.
• As at end-19, YKA had production facilities in 65 locations in China and a total of 4,406 distribution centres/channels. The good distribution network benefitted the company immensely during the COVID-19 lockdown in China when inter-city movement was restricted.
• In 1H20, sales of consumer packs in China reported a growth of 28.7% y-o-y growth, while its food products division reported a 21% y-o-y growth in PBT. Wilmar was able to achieve this due to minimal distribution disruption. In addition, it also gained more market share as competing products were not replenished on time due to the lockdown. As at end-19, YKA had production facilities in 65 locations and 4,406 distribution agents and channels.

Upward Adjustments of Earning Forecast

• We have adjusted our 2020F/21F/22F earnings forecasts up by 19.5%, 6.8% and 4.1 respectively. The adjustments are mainly to reflect higher sales volume and better margin for oilseeds & grain (better demand for soymeal as the swine industry is stabilising and starting to see marginal growth), consumer packs (gained market share during the lockdown period as competing products were not widely available) and sugar merchandising & processing (wider price spread between raw sugar and white sugar positive to sugar refiners).
• We are now expecting 2020F/21F/22F EPS of 21.1 US cents, 21.5 US cents and 22.4 US cents.

Wilmar - Valuation & Recommendation

• Re-iterate BUY with higher target price of S$5.35 (previous Target Price: S$4.80). The higher target price is to reflect higher 2021 earnings forecast and also factors in a higher PE for YKA’s food products (to 30x PE from 26x PE previously) in our SOTP valuation. This implied a blended 2021F PE of 24x for YKA.
• The higher PE valuation given to YKA’s food products is mainly to reflect improving margins due to higher consumer pack sales and higher trading multiple for CSI Consumer Staple Index (from 24x PE to 28x PE).

Wilmar's Share Price Catalyst

Stronger earnings.

• A stronger recovery in 2H20 earnings could happen with potential upside coming from the sudden surge in sales volumes as China relaxes its movement restrictions. Recent newsflow from China revealed that sales of cooking oil, rice and flour is strong, and this could translate into better-than-expected sales volumes.

Potential special dividend.

• Post listing of YKA, we expect Wilmar to declare a special dividend, which could lift dividend yield by 2-2.5ppt (assuming 25-30% payout from the IPO proceed) on top of the expected 3.0% yield from the annual dividend.

Source: UOB Kay Hian Research - 15 Sep 2020