3Q21 Preview: Better Contributions From Up-Midstream Operations

Wilmar is scheduled to release its 3Q21 financial summary on 29 Oct 21. We are expecting a core net profit of US$450m-480m. Better performance is expected to come from plantation & sugar mills and feed & industrial products to offset the weaker margins of consumer products. Its 3Q21 performance is expected to be driven by higher ASP for CPO and sugar, and better soybean crushing margin in China. Maintain BUY. Target price: S$6.40.

WHAT’S NEW

3Q21 core net profit of US$450m–480m. Wilmar International (Wilmar) is scheduled to release its Executive Financial Summary for 3Q21 after trading hours on 29 Oct 21. We are expecting a core net profit of US$450m-480m for 3Q21 (vs 2Q21: US$309m, 3Q20: US$500m), which is better qoq with better contribution from the recovery of China’s soybean crushing operation and also better consumer pack sales. While sugar contributions are usually higher in 2H when sugar milling season starts. Tropical oil will be again the star performer with greater volume and better margins from its timely purchase of raw materials. Based on our estimates, Wilmar’s 3Q21 core net profit is likely to be lower yoy given that 3Q20 was an exceptionally strong quarter.

Crushing margins and sales volume recover from the low in 1H21. Soybean crush volume improved in 3Q21 with higher demand for soymeal. Recall that sales volume for soybean meal (SBM) was lower in 1H21 as usage of SBM in the mixed animal feeds was lower as wheat meal replaced corn meal as wheat price was much cheaper than corn. As corn price weakened while wheat price strengthened, corn regained its share in animal feed formula, which also translated into better SBM sales volume. To recap, if wheat meal is used in animal feeds, less SBM will be used in animal feeds because wheat meal contains higher protein than corn. SBM is mainly used in animal feed as a source of protein.

Plantation & sugar milling to see greater contributions boosted by higher ASP. This division is likely to post stellar performance driven by high ASP for both CPO (ytd: +36% yoy) and raw sugar (ytd: +23% yoy) despite flat to marginal growth in sales volumes. We are expecting sales volume to have a flat to marginal yoy growth due to the weak production as a result of bad weather. Indonesia has been revising down the palm oil production estimate month by month as yield recovery from the dryness in 2019 has been delayed. Sugar production in Australia is expected to be flat yoy as per the USDA report issued on 30 Sep 21.

STOCK IMPACT

High raw material prices to squeeze on consumer products margins. Food products (35% of 1H21’s PBT or 50% of 2020’s PBT) may not be able to meet its strong performance in 2020. Food products consist of consumer products and medium pack & bulk. PBT margin for this division is expected to be narrower as the surge in raw materials prices is not able to be fully transferred to the selling price for consumer products which are in a highly competitive market. For 1H21, its PBT margin dropped to 3.14% vs 4.77% in 1H20 and 4.88% for 2020.

Not severely impacted by China power shortage. The impact from the temporary electricity curb was too overwhelming and we reckon that the impact to Wilmar’s soybean crushing plants would be marginal. Some plants may have been required to shut down for a day or reduce the operation hours, but the overall impact on operations and sales is marginal. On the other hand, the temporary operational shutdown has led to an increase in soymeal prices and will boost soybean crushing margins. Wilmar will benefit from better margins and possibly higher sales volume, as supplies from some peers are being affected by the temporary shutdown.

Adani-Wilmar IPO on track to see listing by end-21 or 1Q22. The Securities and Exchange Board of India (SEBI) has updated its website to reflect the processing status of the draft red herring prospectus (DRHP) submitted by Adani Wilmar Limited (AWL), in relation to its proposed Initial Public Offering (IPO) on BSE Limited and National Stock Exchange of India Limited, as “Observation letter issued on 14 Oct 21”. AWL is responding to SEBI on its observations with regard to its DRHP. Based on the current process and timeline, AWL’s listing still on track to list by end-21 or early-1Q22. The IPO proceeds will be mainly used to fund AWL’s expansion in India, especially to expand their product range, which will eventually mirror the business model in China.

EARNINGS REVISION/RISK

Maintain earnings forecasts. We maintain our earnings forecast for 2021/22/23 with core net profits of US$1.66b, US$1.78b and US$1.95b respectively.

VALUATION/RECOMMENDATION

Re-iterate BUY with a target price of S$6.40. Our target price is based on 2021F EPS and reflects a blended 26x 2021F PE for China operations and blended 11x PE for non-China operations. We like Wilmar 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 CATALYST

  • Embarking on value-enhancing M&As.
  • Better-than-expected earnings.