• Re-iterate BUY on Wilmar International (SGX:F34) as industry data shows improving operating statistics, which points to a better 2H21 performance. Concern on risks from China’s regulatory crackdown is relatively low for the staple food industry which has no risk of monopoly and does not see any excessive price adjustments despite rising raw material prices.
• There are some hiccups to Adani-Wilmar Limited’s listing but the overall impact to Wilmar is marginal.

Overly Concerned on China’s Regulatory Risk, Weak Soybean Crushing in China and Hiccup to Adani Wilmar Limited’s (AWL) Listing

• We attribute the weak share price performance to the following to concerns and will share our view on why investors should not be overly concerned.

Concern 1: China’s regulatory risk after the recent control on the technology and education sectors.

• Our view: Relatively low risk because oilseeds & grains and staple food industries are not dominated or monopolised by private enterprises. In its two major businesses, Wilmar International has about 45% market share in consumer pack cooking oils with COFCO (a China SOE) coming a close second, while in soybean crushing, COFCO has the largest market share. Cooking oil players are also very careful in adjusting the selling price for consumer packs in order not to hit hard on consumer spending.

Concern 2: Weak performance from soybean crushing to persist.

• Our view: While soybean crushing volume and margins were poor in 1H21, we expect better performance h-o-h in 2H21 on the back of better sales volume (animal feeds inventory down significantly from its peak in 1Q21) and improving crushing margins since mid-Jul 21.

Concern 3: Hiccup to AWL’s IPO.

• Our view: There is still no investors in other listed entities of its partner Adani Enterprises Limited.

Stock Impact

• Industry data shows improving contributions from soybean crushing. To recap, the weaker profit contribution from soybean crushing in 1H21 is attributable to lower animal illustrated in the following table, based on the new levy, the price gap between the CPO and palm olein has narrowed by 8.1% but there is still a good US$97/tonne price advantage vs the refining cost of US$20/tonne.

Wilmar International - Valuation & Recommedation

• We maintain our earnings blended 11x P/E for non-China operations.

• We like Wilmar International for its diversified and integrated business model which has delivered good results performance despite the global uncertainty in 2020 and 1H21 amid the COVID-19 pandemic.
• Share price catalysts:
  • Embarking on value-enhancing M&As.
  • Better-than-expected earnings.

Source: UOB Kay Hian Research - 7 Sep 2021