• Wilmar’s 2020 core net profit came in within our expectation. The strong performance can be mainly attributed to robust sales volumes and better margins for all segments. Wilmar has proposed a final and special dividend of S$0.155/share.
• Wilmar's earnings outlook should remain positive with:
  1. sales volumes remaining healthy thanks to the Chinese economy’s rebound;
  2. strong recovery in China’s swine industry; and
  3. better palm and sugar prices.
• Maintain BUY. Target price: S$6.40.

Wilmar's 4Q20 Results Within Expectation

• Wilmar International (SGX:F34) reported core net profit of US$851m for 2H20 (+2.6% y-o-y, +33.8% h-o-h) and full year core net profit of US$1,486m (+18.3% y-o-y) vs our forecast of US$1,505m. The variance was mainly due to mark-to market losses on derivatives for feed and industrial product segments, which is expected to reverse in coming quarters.
• Profit before tax growth was stronger at 36.1% y-o-y vs core net profit growth of 18.3% y-o-y due to higher minority interest in 2H20 from the listing of Yihai Kerry Arawana (YKA).
• All Wilmar's business segments improved in 2H20, mainly boosted by better margins from its oil, flour and sugar businesses, while China’s recovery from the COVID-19 pandemic had also resulted in a sharp recovery in its medium pack and bulk products sales volume.

Highest dividend since listing.

• Wilmar's management has proposed a record dividend of S$0.13 (including interim of S$0.04) and special dividend of S$0.065 per share. The total dividend proposed for 2020 is S$0.195 vs total dividend of S$0.125 for 2019. This would translate into a dividend yield of 3.5%.

Yihai Kerry Arawana (YKA)'s results.

• Yihai Kerry Arawana (300999:SZSE) posted a revenue growth of 14% y-o-y to RMB194.9b on the back of stronger sales volume from both kitchen food and animal feeds & oleochemical segments. 2020 PBT saw a stronger 26.2% y-o-y growth on the back of higher sales volume and slightly better margins. 2020 sales volume was very much driven by better consumer pack sales which offset the weakness in sales to HoReCa (hotels, restaurants and catering), and strong recovery of animal feed sales as the swine population started to recover from the significant drop in 2019 caused by the African Swine Fever.
• Net profit grew 11.1% y-o-y, lower than PBT growth due to higher effective tax rate arising from better profit contributions from operations with higher tax rate. YKA’s earnings contributed ~56% of Wilmar’s 2020 core net profit.

Outlook for 2021

• Demand for its food products will continue to be strong and healthy food products. Management had also mentioned that its wide range of food product offerings had helped to reduce their manufacturing, distribution and marketing cost.
• Feed & industrial products segment to remain satisfactory on the back of continued strong recovery of hog farming in China and positive manufacturing margins.
• Oil palm plantation and sugar milling segment will benefit from higher palm oil and sugar prices.

Wilmar International - Earnings Forecast & Recommendation

• Maintain earnings forecasts. We forecast Wilmar's 2021-22 core net profit at US$1.63b and US$1.75b respectively.
• Maintain BUY with a target price of S$6.40. Our target price is based on 2021F EPS and reflects a blended 26x 2020F P/E for China value PPB Group (PPB:Bursa) at a fair value of RM21.60.

Cheaper entry to get exposure to YKA.

• Based on its current share price, YKA is trading at a lofty 83x 2021F consensus earnings. We deem this overvalued given that its consumer staple peers are trading at an average of 40-45x with the exception of Foshan Haitian.
• Wilmar’s current market value is only about 38% of YKA’s, making Wilmar a cheaper entry for exposure to China’s consumer staples.

Share price catalyst

• Better-than-expected earnings.
• Embarking on value-enhancing M&A.

Source: UOB Kay Hian Research - 23 Feb 2021