• Outlook for most of Wilmar's key earnings indicators looks positive heading into 1Q21.
• Potential catalysts are plans to unlock value, value-accretive M&As, stronger earnings and narrowing of Wilmar’s valuation gap with Yihai Kerry Arawana (YKA)
• Reiterate ADD on Wilmar for more liquid exposure to YKA with SOP-Target price of S$6.15.

Key Takeaways on Wilmar's Earnings Prospects

• During its 4Q results briefing, Wilmar (SGX:F34) explained that the weaker sequential earnings from 90%-owned Yihai Kerry Arawana (YKA) in 4Q20 were due mainly to mark-to-market losses on hedging derivatives for soybeans incurred by its feed and industrial products division. The good news is that these losses are expected to reverse in the next few quarters and should be positive for earnings.
• Wilmar revealed that crush margins have remained positive and it expects the palm oil and sugar division to do better in the coming quarters in view of the higher ASPs for palm oil and sugar. The group indicated that the demand for its consumer products during the Chinese New Year festive period has been robust as Wilmar’s quality and healthy product offerings are gaining good traction with customers.
• Wilmar also indicated that the key earnings contributors to the group after YKA (China operations) are Indonesia, India and Vietnam.
• Wilmar hopes to sustain the dividend payout (excluding special dividend) in 2021F and will continue to look at ways to expand as well as unlock value in the group.

The Widening Valuation Gap Between YKA and Wilmar

• Wilmar successfully listed YKA on 15 Oct and raised US$2bn. YKA’s share price has jumped multi-fold (or 2.87x) to RMB99.48 following its listing at RMB25.7. Today, its 90%-owned YKA is worth US$75.1bn, based on the latest market cap or 2.9x more than Wilmar’s market cap of US$25.9bn.
• The higher valuation accorded to YKA could be due to stronger liquidity in China as well as better appreciation of the growth prospects of YKA by Chinese investors. Given the three-year moratorium, Wilmar will not be able to sell down its YKA holdings in the near term. However, Wilmar could fund potential M&As within and outside China, complementary to its existing YKA businesses, via the issuance of new YKA shares.
• Wilmar reiterated that it is expediting expansion plans in China, which involve setting up more large-scale processing facilities in new locations, raising R&D expenditure and venturing into value-add and complementary products like soya sauce, condiments, central kitchen, yeast, sesame, noodles, etc.

Wilmar's Key Earnings Drivers for FY21F

• We project Wilmar to record 7% earnings growth in FY21, driven by better food products division performance, higher palm products’ processing margin (new export levy structure in Indonesia) and higher plantation and sugar milling earnings.
• We continue to rate Wilmar an ADD as the stock is undervalued and offers a cheaper inability to pass on higher commodity prices to consumers, and weaker earnings.

Source: CGS-CIMB Research - 24 Feb 2021