• Wilmar International’s 1H21 results came in slightly above our expectations. The positive variance mainly came from better-than-expected sugar, oilseeds and grains contributions. 2H21 earnings could come in stronger mainly supported by higher production and higher commodity prices for palm and sugar.
• Adani Wilmar’s (AWL) potential listing would unlock shareholders’ value; however, it might not be as great as YKA’s listing due to its lower contribution to Wilmar International.
• Maintain BUY. Target price: S$6.40.

Wilmar's 1H21 Results Within Expectations

• Wilmar International (SGX:F34) reported core net profit of US$732m for 1H21 (-14% h-o-h, +15% y-o-y) contributing 45% of our full-year assumption. We deem the result higher than our expectation of US$675m-695m. The positive variance mainly came from the better-than-expected contributions from sugar and oilseeds & grains divisions. Having said that, 2Q21 core net profit came in lower at US$309m, dropped by 27% q-o-q due to lower margin and seasonally low demand.
• Better feed and industrial products segment (39% of 1H21 PBT) mainly supported by good refining margins from tropical oils and higher demand for tropical oil downstream products. However, lower soybean crusing volume and higher raw material cost had partially me in both the sugar and tropical oils business.
• Higher y-o-y plantation & sugar milling segment (13.5% of 1H21 PBT) mainly driven by better palm oil and sugar prices despite lower sugar sales volume. The palm plantations’ good performance was further supported by higher FFB production in 1H21 which increased by 9% y-o-y. We expect both the plantation and sugar milling segments to deliver higher margins in 2H21 on the back of higher selling prices.
• Food products segment (35% of 1H21 PBT) came in weaker in 1H21 mainly due to the higher feedstock prices and hence leading to lower margin. The operating margin for the food products segment dropped from 5.0% to 3.1% h-o-h. Having said that, the group made an upward adjustment to the selling prices of consumer pack products in 1H21. However, the selling price adjustment is still not able to fully offset the tremendously increasing raw material cost.
• YKA results. Yihai Kerry Arawana (YKA) posted 1H21 net profit and recurring net profit of RMb2.97b (-1.2% y-o-y) and RMB3.91b (+36.6% y-o-y) respectively on the back of a revenue growth of 19% y-o-y to RMB103.2b. The higher revenue was supported by stronger sales volume from both the kitchen food and animal feeds & oleochemical segments. However, the soaring raw material cost led to lower margin in the kitchen food segment even with YKA adjusting the selling prices. On top of that, there is a change of consumer where hotel, restaurant and catering (HORECA) is back with higher sales volume as compared with the retail consumers which led to a lower margin in the kitchen food segment.

Stock Impact

• Feed & industrial product segment is expected to products margin may see some improvements but still lower y-o-y with the continued increasing raw material cost despite the adjustment to products’ selling prices. Having said that, we expect higher sales volume from HORECA and lower retails demand since individuals had stocked up since last year.

Earnings Revision

• We maintain our earnings will be given after the briefing on 13 Aug 21.

Valuation & Recommendation

• Maintain BUY on Wilmar International with a target price of S$6.40.
• Our target price is based on 2021F EPS and reflects a blended 26x 2021F P/E for China operations and blended 11x P/E for non-China operations.

• Wilmar has declared a dividend of S$0.05/share, payable on 27 Aug 21.

Source: UOB Kay Hian Research - 12 Aug 2021