• Wilmar is scheduled to release its 3Q22 Executive Financial Summary on 28 Oct 22. Based on our current estimates, we expect Wilmar to report a core net profit of US$470m-490m for 3Q22 (3Q21: US$576m; 2Q22: US$477m).
• However, the industry trends that we observed for 3Q22 could signal stronger earnings, which could come within US$530m-550m supported by better-than-expected margins from palm oil downstream and soybean crushing.
• Maintain BUY rating on Wilmar.

Wilmar – 3Q22 Results Preview

• Wilmar International (SGX:F34) is scheduled to release its 3Q22 Executive Financial Summary on 28 Oct 22 after market close –
• Based on our current estimates, we expect Wilmar to report a core net profit of US$470m-490m for 3Q22 (3Q21: US$576m; 2Q22: US$477m). However, the trends that we observed for 3Q22 could signal stronger earnings, which could come within US$530m-550m.
• Palm refining margin relatively stable despite the sharp fall in palm product prices. The correction in palm oil prices is not affecting refining margins, which did not contract as much after the sharp correction in CPO price. Refining margins were relatively steady despite the correction in refined products, and some by-product prices did not fall as sharp when compared with CPO. In addition, sales could come in higher as palm oil exports volume from Malaysia and Indonesia was higher than expected thanks to strong demand recovery after prices dropped.
• Operations in China likely to beat our expectation as well, due to:
  1. better crushing margins (albeit margins not being as high as the last two years), and
  2. higher sales volume for consumer packs and soybean meal.
• Wilmar may have captured larger market shares for the food ingredients and feeds markets in China as its peers were affected by the unscheduled shutdowns caused by power shortages and the spike in soybean meal (SBM) prices due to short-term supply squeeze.
• Sugar may not perform well as the crushing season in Queensland was delayed by heavy rainfall. The third La Nina led to heavy rainfall in Australia, which is affecting the sugar milling season in Queensland. This may result in:
  1. a delay in the milling season and cause some earnings to be booked in 4Q vs the usual 3Q, and
  2. lower sugar yield, as the high rainfall could reduce sugar production.

The Expected Performance by Wilmar's Reporting Segment

Food products (32% of 1H22 PBT) – Better y-o-y.

• Recall that this segment was badly affected in 2H21 by the spike in feedstock prices, and it was not able to pass the hike down to consumers. Since then, consumer packs products prices in China have been adjusted up, which already showed in 2Q22 results.
• With feedstock cost easing and adjusted ASP, this segment is expected to post good earnings growth y-o-y. Sales volume will be supported by:
  1. the festive season, and
  2. the lockdown of cities in China, as it induces higher demand for consumer pack cooking oil.
• These could mitigate the impact of lesser demand from the HoReCa sector.

Feed & industrial (31% of 1H22 PBT) – Stronger y-o-y:

• This division is likely to be the star performer again in 3Q22. The main driver is expected to come from its palm oil downstream operations, which benefitted from the sustained good refining margins and higher sales volume. As shown in the two charts in the report attached below, palm oil exports from Malaysia and Indonesia were higher in 3Q22 vs 1Q22 and 2Q22, and refining margins were still higher y-o-y.
• As the largest palm trader, Wilmar’s palm operations should be able to deliver a good set of results based on these indicators. Meanwhile, demand for animal feeds could be better as the improving hog margins could mitigate the impact from lower crushing margins. Its margins could be also enhanced by its good raw material purchasing strategy.

Plantation & sugar (27% of 1H22 PBT) – Could be lower y-o-y.

• The sharp drop in CPO prices will lead to lower contribution from its palm division. In addition, the delay of Australia’s sugar milling season may result in lower earnings contributions from this segment, but these should be mitigated by better contributions from sugar.
• However, note that some of the sugar milling profit from Australia may be delayed into 4Q22 as the high rainfall in Queensland could have delayed the milling activities.

Wilmar – Earnings Forecast Revision & Recommendation

• We maintain our net profit earnings forecasts for Wilmar's 2022/23/24 at US$1.79b, US$1.83b and US$2.01b respectively.
• If 3Q22 core net profit comes in within US$530-550m, there is a possibility of a 5-7% upward adjustment to 2022 earnings forecast for Wilmar.
• Maintain BUY. Our target price for Wilmar is derived using the SOTP-based valuation of S$5.50 by pegging a 2022F P/E of 17x for the China operations and a blended 11x P/E for the non-China operations, which 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 - 19 Oct 2022