• Wilmar’s 3Q20 core net profit came in above our expectations on the back of strong performance from consumer products and oilseeds & grains, supported by robust sales volumes. Earnings growth should remain positive with:
  1. sales volumes remaining healthy, thanks the Chinese economy’s rebound; and
  2. easing of lockdown measures in other countries.
• Wilmar also announced its plan to distribute 15% of Yihai Kerry Arawana (YKA)’s IPO proceeds as special dividend.
• Maintain BUY. Target price: S$5.35.

Wilmar's 3Q20 Results Above Expectations

• Wilmar International (SGX:F34) reported a 3Q20 core net profit of US$501m (+52% q-o-q, +20% y-o-y), marking the highest 3Q core net profit ever recorded since its listing. This brought its 9M20 core net profit to US$1,137m, above our expectations where it accounted 84% of our full-year estimate.
• The strong set of results was supported by strong contribution from consumer packs (high demand for food products) and oilseeds & grains (higher crushing activities as the African swine fever situation in China has eased).
• The results were further boosted by better performances from the plantation and sugar milling segments, benefitting from higher selling prices.

Robust Sales Volumes in 3Q20

• Overall food product sales volumes had increased by 22% q-o-q and 16% y-o-y, mainly driven by sugar and flour product sales. Sales of medium-pack and bulk food products showed a strong recovery (+18% q-o-q, +15% y-o-y) after the easing of lockdown measures.
• Feed and industrial product sales had also increased on the back of strong sugar merchandising and ramp-up in soybean crushing activities. The weakness in tropical oil sales (dropped by 8% y-o-y) did not come as a surprise to us, given that CPO production was muted. However, resilient refining margins should have contributed good earnings to Wilmar’s bottom line.

Wilmar's Outlook Remains Positive

• We expect sales volumes from China to remain robust with the economy having rebounded and we also expect a pick-up in other Asian countries where lockdown measures have eased. With the tightness in global vegetable oils supply balance, palm prices are expected to remain firm into early-21. This would continue to benefit its plantation segment over the next quarter.
• Wilmar's management had also mentioned that processing margins for tropical oils and oilseed crushing margins were expected to be satisfactory for the rest of the year.
• Sugar operations are expected to do well for this year, aided by a strong white sugar premium and the recent recovery in sugar prices.

Special Dividend From YKA Listing

• The board had announced a special dividend of approximately 15% from Yihai Kerry Arawana’s (YKA) initial public offering (IPO) proceeds of US$2.05b (or ~6.6 S cents, dividend yield of 1.6%), which will be declared in 2021. The details of the special dividend will be disclosed in Feb 21 together with Wilmar’s 2020 full-year results. This is lower than market expectations of a 25-30% payout.
• There is a possibility that Wilmar will declare a higher final dividend, given that the company’s full-year core net profit is expected to be better than guidance.
• For 2019, Wilmar declared a total dividend/per share of 12.5 S cents and had declared an interim dividend of 4 S cents in Aug 20 for the financial year ending 2020.

YKA’s 9M20 Earnings Surpassed Guidance

• YKA reported net profits of Rmb2.1b (+10% y-o-y) and Rmb5.1b (+36% y-o-y) on the back of 14% y-o-y and 12% y-o-y growth in revenue for 3Q20 and 9M20 respectively.
• Factoring in the effective 90% stake, YKA’s 3Q20 and 9M20 net profit make up 50% and 57% of Wilmar’s 3Q20 and 9M20 net profits respectively.

Maintain Earnings Forecasts

• We maintain our forecasted Wilmar's 2020F/21F/22F EPS at 21.1 US cents, 21.5 US cents and 22.4 US cents respectively.
• Our target price is based on 2021F EPS and reflects a blended 24x 2020F PE for China operations and blended 11x PE for non-China operations.

Huge Holding Company Discount Not Justifiable

• Based on the last closing price, YKA has a total market cap of US$37.3b vs Wilmar’s US$18.8b. As a holding company of YKA, Wilmar is currently trading at an almost 50% discount to YKA, which is not justifiable. This has the other divisions appearing undervalued and also places Wilmar as a much cheaper entry into YKA.

Wilmar's Share Price Rerating From YKA

• With its strong market position and branding in China, YKA’s share price had increased by +179% from its IPO price at Rmb25.70/share to Rmb45.99/share. And yet, Wilmar's share price had dropped by 7% from the YKA listing to date. We expect Wilmar's share price to rerate on the back of strong earnings contribution from YKA (contributing about 60% to Wilmar earnings) and the current discount between YKA's and Wilmar's share price.

Source: UOB Kay Hian Research - 2 Nov 2020