• Wilmar International (SGX:F34) remains our ESG champion, with excellent ESG disclosure and decent progress in recent years. Given our expectations of volatile CPO prices, we favour Wilmar International due to its integrated and diversified business model, with cheap valuations – it is trading at 10x FY23F P/E, well below its big-cap peer range of 14-16x.
• Maintain BUY recommendation on Wilmar International with new SOP-based target price of S$4.95 from S$5.05, 21% upside with ~4% FY22F yield.

CPO Prices Have Plunged

• CPO prices have plunged on the back of the unwinding impact of Indonesia’s export ban, as well as recession fears which pulled down commodity prices in general. We believe the price decline could have been slightly overdone, having fallen by 44% in seven weeks – much more than the declines in soybean, crude oil and wheat prices (down 31%, 17% and 16%).
• While regulatory risks still exist, particularly for players in Indonesia, we believe supply concerns will continue to haunt the sector for the rest of 2022 – in view of the logistics backlog in Indonesia and the labour shortages in Malaysia.
• That said, assuming these issues are resolved by end-2022, and Ukraine is able to export its oilseed products as per the grains deal agreement signed, 2023 should still be a better year for supply and prices should remain under pressure.

ESG Concerns Are Still Present, But May Have Taken a Backseat

• However, the ESG discounts we previously assigned to valuations are still in place. We have reassessed our ESG scores by relooking at the progress made by the industry, identifying shortcomings and any room for improvement.
• From our analysis, we highlight that better disclosure on ESG-related information has been made over the years, but progress in mitigating these issues is rather slow. As a result, we have increased the ESG scores of some planters that have made progress – but highlight that several peers have remained relatively stagnant in their ESG efforts, while others have even reduced disclosures.

We Tone Down CPO Price Assumptions and Lower Target Price for Wilmar

• We continue to expect stock levels to remain tight for the next 2-3 months, possibly until end-3Q, which would provide support for CPO prices. We trim CPO price assumptions for 2022 to MYR5,100/tonne (from MYR5,300/tonne).
• For 2023, as fundamentals continue to improve – assuming labour shortages are somewhat resolved and the Ukrainian oilseed output is able to be exported, CPO prices could decrease even more. However, support from a ramp-up in biodiesel mandates and discretionary biodiesel demand coming back would keep CPO prices above MYR3,000/tonne in the medium term.
• We lower our 2023 estimate to MYR3,900/tonne (from MYR4,300/tonne). Our MYR3,500/tonne assumption for 2024 remains unchanged. As a result, we trim Wilmar International’s FY22-24F earnings forecast by 0.2-2.9%.

• Maintain BUY recommendation on Wilmar International, with a lower target price of S$4.95 from S$5.05. Our SOP-based target price for Wilmar International includes a 2% ESG premium, based on an ESG score of 3.1.
• We continue to believe Wilmar International is undervalued, as its combined stakes in Yihai-Kerry and Adani Wilmar are double that of its current market cap.

Source: RHB Invest Research - 11 Aug 2022