• We remain positive on Wilmar International for 2021 with earnings from food products remaining strong and satisfactory performance from its feed and industrial products segment despite lower crushing margin.
• We expect the tropical oil and sugar segments to continue benefitting from the high commodity prices. Wilmar International has also started building its central kitchens in China, which are expected to be its largest project in China and will be completed in 4-5 years.
• Maintain BUY. Target price: S$6.40.

Wilmar's 1Q21 Results Highlights

• We remain positive on Wilmar International (SGX:F34) after the analysts’ briefing. The key highlights from its 1Q21 results briefing are as follows:

Food products continue to be strong

• Food products continue to be strong on the back of China’s economic recovery and the Chinese population’s demand for healthier and more premium products. Sales volume of consumer packs have climbed back to pre-COVID-19 levels, and are even higher than the previous years. The demand for food products is expected to drop marginally only amid high prices, and is mainly attributed to the inelastic demand for consumer staples. There is some pricing transfer in bulk products due to high commodity prices, but not much is transferred to consumer pack products due to higher market competition.

Feed and industrial products segments remain satisfactory.

• PBT margin is expected to come in lower. The main drivers for each sub-segment are as follows:

Oilseeds & grains:

• Soybean crushing has started to slow down due to weaker demand for soymeal (which has been affected by the re-emergence of African Swine Fever (AFS)) and also replacement of wheat meal from corn meal, as the former is much cheaper now.
• Wheat meal has higher protein content compared with corn meal; thus the overall demand for soymeal volume has subsequently decreased. Wilmar’s soybean crushing utilisation rate is at ~60% currently.

Tropical oil:

• This segment remains profitable with high CPO prices. Internal CPO production is expected to increase by 5% y-o-y for 2021. The high CPO price and the sharp inverse forwards curve may not lead to tighter refining margins. Indonesia’s biodiesel delivery for local mandate is on track and is still profitable based on current biodiesel conversion price. Palm mid-and downstream operations are running close to full capacity.

Sugar merchandising & processing segment

• Sugar merchandising & processing segment is expected to continue benefitting from high sugar pricing and better white sugar premium. This division could potentially deliver its best-ever results in this financial year.

Wilmar's 2Q21 Outlook

• 2Q is seasonally the weakest quarter for Wilmar soybean hedging. On top of that, sugar earnings is expected to continue to expecting Wilmar's 2Q21 core net profit to be lower q-o-q but at least match 2Q20’s core net profit of US$329m.

Listing of Adani Wilmar

• Wilmar is looking into listing Adani Wilmar, and is working with the bankers, but nothing is likely to be long, but may be slightly faster than in China.

Central Kitchens in China Will be Its Largest Project for the Next 4-5 Years

• The high rental cost, labour cost and difficulty in retaining chefs have driven the demand for central kitchens. Wilmar is in good position as it has land to construct integrated complexes. Wilmar will open up its central kitchen to rent to other players. Wilmar’s central kitchens share the same distribution channels, and hence, the cost is shared among all the products that go to same clients.
• Partners can also leverage on Wilmar’s central buying of raw materials to reduce cost, and also to leverage on Wilmar’s strength in culinary school. Wilmar is building four central kitchens this year and another 10 in 2022, which would start to contribute earnings operations commence.

Wilmar - Valuation & Recommendation

• We maintain our forecasts for Wilmar's 2021/22/23 core net profit scale and proximity to feedstocks/end-markets.
• Maintain BUY on Wilmar with a target price of S$6.40. Our target price is based on 2021F earnings per share and reflects a blended 26x 2021F P/E for China operations and blended 11x P/E for non-China operations.

Source: UOB Kay Hian Research - 3 May 2021