Potential Surprises on the Way?

• We see four areas where Wilmar International (SGX:F34) can potentially surprise in 4Q20:
  1. record soybean crush margins,
  2. rising palm oil prices,
  3. normalising post- COVID activities in China and
  4. margin accretive Indonesian export taxes.
• Yet Wilmar is trading at a 75% discount to its own Chinese listed subsidiary YKA. We believe, over the longer term, this may trigger further actions to unlock value such as more asset carve outs or even privatisation.
• While Wilmar's share price has re-rated 21% in the past 1-month, we believe significant upside exists as they execute.
• BUY with target price $6.80.

Better Than Expected Operating Environment

• 4Q20 Chinese soybean crushing margins have increased 3x q-o-q to reach the highest level since records began in 2015. Chinese hog inventories have increased 42% y-o-y in 2020, as it rebuilds stocks following African Swine Flu (ASF). Nevertheless, inventories are still ~20% below pre-ASF levels. As China’s largest soybean crusher, this should result in significant upside surprise to Wilmar margins in 4Q20, we believe.
• In 3Q20, Wilmar's management claimed hotel/restaurant demand is normalising as activities increased with COVID-19 containment. We expect further acceleration here. While rising food prices are a concern (UN FAO index up 18% since May 2020), Wilmar claims they have been passing on the higher costs so far.
• The 30% 4Q20 rise in palm oil prices may drive upside surprise for Wilmar’s upstream business, while the recent changes to Indonesian palm oil export taxes should positively impact its refined palm oil exports, we believe.

Same Asset. Two Hugely Different Values

• Wilmar’s 90% Chinese subsidiary Yihai Kerry Arawana (YKA, 300999 CH) has risen 2.2x since its IPO in Oct 20. This means the parent is trading at a 75% discount on SGX with its other regional businesses having no implied value.
• While there are advantages by the fact that the HoldCo is listed in Singapore (such as funding access), the large valuation differential may catalyse further strategies to unlock value. Over the longer term, this may include further asset hive-offs or privatisation, we believe.

Upgrade Target Price. Maintain BUY

• Wilmar is set to release 4Q20 end-Feb. We leave our EPS estimates unchanged. However, we update our blended DCF (WACC 5.3%, 1% terminal growth) and peer P/E (target P/E of 44x), to the latest price action of peers.
• In an abundance of caution, we have reduced the DCF:PE weighting on the target price from 70:30 to 80:20. YKA trades at 87x 2021E P/E vs. 15x for Wilmar.

Source: Maybank Kim Eng Research - 13 Jan 2021