• Wilmar’s 1H22 core net profit of US$980m came in above our expectations. The positive variance mainly came from strong operating margins.
• We expect Wilmar's 2H22 earnings to remain resilient, supported by greater sales volume and higher margin for its consumer products as well as higher contribution from sugar millings. We expect the palm upstream operation contribution to be lower as commodity prices have softened recently but still better y-o-y.

Wilmar's 1H22 Results Beat Expectation

• Wilmar International (SGX:F34) reported net profit of US$1,165m for 1H22 (+2% h-o-h, +55% y-o-y). After adjusting for non-core items and the gain from the listing of Adani Wilmar, Wilmar’s core net profit arrived at US$980m for 1H22 (-12% h-o-h, + 34% y-o-y). This contributed about 55% of our 2022 full-year forecast. The positive variance mainly came from the better-than-expected margins especially from the food products and feeds & industrial products segments. Contributions from its associates and JVs in Europe and Southeast Asia were also higher in 1H22.
• Strong margin improvement for food products segment. The profit before tax (PBT) margin for the food products segment had increased significantly from 1.6% in 2H21 to 3.3% in 1H22. This was mainly contributed by upward price adjustments (mainly in 2Q22) for its consumer pack products to mitigate the impact of continuous increases in commodity prices. On top of that, we reckon that this is also supported by Wilmar’s wise procurement strategy.
• Strong recovery from its China operations, YKA. The PBT for Yihai Kerry Arawana (YKA) had improved significantly in 1H22 by 98% h-o-h. This is supported by both the food ingredient and feed and oil & fats segments’ gross profit margins improving significantly. We believe that the strong performance of YKA’s feed and oil & fats segments was supported by the recovery of crushing margins and prudent procurement of feedstocks.
• Much stronger palm downstream margins despite lower sales volume. We reckon that Wilmar’s palm downstream margin had also improved in 1H22, thanks to its:
  1. higher ASP for palm products, and
  2. better margins from its Malaysian downstream operations and palm products that are not under Indonesia’s exports ban list.
• Food products segments’ margin continues to improve in 2H22. With a healthy demand for food products as it is less impacted by slowing economies, higher ASP and lower feedstock prices, we expect the food products segments to continue to improve in 2H22.
• Better performance from downstream operations. We expect the recent corrections in commodity prices will hopefully restore some of the demand destroyed by high prices and improve margins in the downstream business.
• Lower contribution from palm upstream operation. The contribution from palm upstream may be lower in 2H22 h-o-h, as palm oil prices have fallen from their peak in 2Q22. Having said that, palm oil prices are higher than during pre-COVID-19, hence we expect the margin for palm operations to remain healthy.

Maintain Earnings Forecasts

• Wilmar proposed an interim tax exempt dividend for 1H22 of S$0.06/share (vs 1H21 of S$0.05/share), translating to a dividend yield of 1.5%. The dividend will be payable on 24 Aug 22.
• We are maintaining our earnings forecast while we await the upcoming analyst briefing by Wilmar. Our current net profit forecast is at US$1.77b, US$1.82b and US$2.0b for 2022, 2023 and 2024 respectively.
• Maintain BUY recommendation on Wilmar with a target price of S$5.50. Our target price is derived using the SOTP-based valuation by pegging a 2022F P/E of 17x for the China operations and a blended 11x P/E for the non-China operations. The fair value of S$5.50 translates to a blended 2023F P/E of 15.3x.

• Catalysts:
  • Stronger-than-expected performance from its China operations.
  • Surprise margin upside with its strategic procurement activities.

Source: UOB Kay Hian Research - 5 Aug 2022