• We raise Wilmar 4Q20 core net profit forecast to US$350m-380m on better-than-expected contribution from YKA. Recent share price performance was driven by better earnings outlook and the strong rally in YKA’s share price, which has appreciated 370% from its IPO price of RMB25.70 since listing on 15 Oct 20.
• Maintain BUY on Wilmar International (SGX:F34) with target price of $6.40.

Positive Factors Supporting Wilmar’s Share Price Performence

• Wilmar's share price has appreciated about 21% over the last month. We attribute this to the following:
  • Strong performance from China operation supported by high soybean crushing volume and steady crushing margins. Sales of consumer products continue to grow.
  • Strong performance from Yihai Kerry Arawana (YKA) (300999 CH). Share price has surged 370% since its listing on 15 Oct 20. This translates into a substantial holding company discount of 80% based on Wilmar’s 90% stake in YKA. According to online news portal, there were some 80 reports issued in Dec 20 on YKA by analysts. Based on Bloomberg data, 13 analysts have issued BUY recommendations.
  • Getting closer to getting the special dividend of about 6.5 cents/share from YKA’s IPO proceeds, which is expected to be declared in Feb 21 and payable in May 21.

Wilmar's 4Q20 Earnings Preview

• Wilmar will announce 4Q20 results in late-Feb 21. We are expecting core net profit US$350m-380m (4Q19: US$410m, 3Q20: US$501m). The star performer is likely to be the sugar segment, which is expected to contribute positively due to rising raw sugar prices and good white sugar margin.
• China operation continued to see steady performance, largely supported by the food ingredient division. We may see earnings volaility from soybean crushing and palm operations due to the strong surge in prices in Nov-Dec 20.

Wide Spread of Production Plants and Distribution Network Becoming Core Competitive Advantage

• The strong production and distribution network that Wilmar has built up over the years has given Wilmar a competitive edge during this COVID-19 pandemic period, especially in China and India.
• In China, during the Wuhan lockdown, Wilmar’s plants in Wuhan were still in operation to ensure sufficient supplies of staple food to the cities. Its plants also continued to operate in the recent lockdown in Shijiazhuang. Thus, earnings contributions from China are growing at a rate of low-to mid-20s percentage in 2020 on the back of market share gains and better demand for premium products.

In-house Shipping Mitigates the Impact From Rising Shipping Cost

• Wilmar also owns a fleet of liquid and dry bulk carriers to support part of its shipping requirements. This integrated model has worked to its advantage as shipping costs have risen in the past few months due to supply constraints. As at end-19, Wilmar owned and controlled 43 liquid bulk vessels and 16 dry bulk vessels with a total tonnage of about 2.5m metric tonnes.

Wilmar - Earnings Revision & Recommendation

• We raise our Wilmar's 2020 core net profit forecast up by 11.2% to US$1.51b (from US$1.35b). We also raise 2021-22 core net profit forecasts by 18% and 20% respectively to factor in stronger contribution from China operations and demand recovery from other markets, especially from Indonesia, India and Africa.
• Maintain BUY with higher target price to factor in higher earnings and ascribing a higher P/E of 26x to YKA’s earnings. We value PPB Group (PEP MK) at RM22.85.

Cheaper Entry to Get Exposure to YKA

• Based on current share price, YKA is trading at a lofty 98x 2021F consensus earnings. We deem this overvalued, given consumer staple peers are trading at 40-45x, except Foshan Haitian. Wilmar’s current market value is only about 20% of YKA’s, making Wilmar a cheaper entry to get exposure to China’s consumer staples stocks.
• We attached a holding company discount of 40% (the peak discount of PPB Group's share price to its RNAV) and 20% (last three years’ average discount to RNAV) respectively.

Source: UOB Kay Hian Research - 13 Jan 2021