2H21 Preview: On Track To Meet Our Earnings Estimate

Wilmar is scheduled to release 2H21 results on 22 Feb 22. We expect a core net profit of US$380m-400m for 4Q21 or US$956m-976m for 2H21, driven by strong performances from palm and sugar operations which offset the weaker contribution from China. Wilmar’s share price performance remains lacklustre despite another record earnings year, due to concerns over China’s weak economy and COVID-19 restrictions weighing on domestic consumption. Maintain BUY. Target price: S$6.00.

WHAT’S NEW

2H21 results preview. Wilmar Interntional (Wilmar) is scheduled to release its 4Q21 results on 22 Feb 22. It is on track to meet our earnings estimate of a full-year core net profit of US$1.7b (another record profit) implying yoy earnings growth of 11.3%. We are expecting a core net profit of US$380-400m for 4Q21 (vs 4Q20: US$349m, 3Q21: US$576m) or US$956-976m for 2H21 (2H20: US$851m, 1H21: US$732m).

Strong performance from plantation and sugar milling. The plantation and sugar milling divison, which is the upstream operation for Wilmar, is expected to see significant earnings increase yoy and hoh in 2H22. For 1H21, this division only contributed about 13% of 1H21 profit before tax (PBT), but this is expected to increase to 22-25% of 2H21 PBT on the back of strong selling prices. CPO and sugar price increased by 35% and 26% yoy respectively in 2021. 2021 is likely to best earnings year for this division since 2016.

Food products (35% of 1H21 PBT) still facing stiff margin pressure from high raw material costs. Consumer products continued to be under margin pressure as high raw material costs are unable to be passed down. Most consumer products sold by Yihai Kerry Arawana (YKA) are staple foods and the Chinese government has been focusing on price stability in order to control food inflation. On a positive note, the sales volume for 4Q21 likely to be better yoy as Chinese New Year falls at the start of Feb 22 vs mid-Feb 21. This will lead to CNY festive sales being front-loaded into 4Q21.

Feed & industrial products (39% of 1H21 PBT) to get support from palm operations. This division could see better contribution in 2H21 vs 2H20. Recall that the segment was impacted by mark-to-market losses on hedging derivatives in 4Q20, which were reversed in 1H21. Looking at the sub-divisions, tropical oils (palm downstream operations) should be able to compensate for the weakness from its oilseeds & grains. Oilseed & grains was weak in 2Q21 and 3Q21 due to poor margins and low volume, but crushing margins and crushed volume improved in 4Q21 with the recovery of pork prices and higher demand for animal feed.

STOCK IMPACT

Lower biodiesel allocation. Wilmar is the world’s largest palm-base biodiesel producer with installed capacity of 4m tonnes as at end-2020. It is the largest biodiesel supplier to Indonesia’s biodiesel mandate as well. However, as more capacities have come onstream in the past few years, the volume allocated has been reduced. For 2022, the allocation to Wilmar has been reduced by 15% to 2.71m kl vs 3.19m kl allocated in 2021. We do not view this as a concern as the capacity expansion is in tandem with Indonesia’s biodiesel roadmap, and the mandate is expected to increase to 40% (B40) from 30% now, which will increase the usage of biodiesel by at least another 3m kl or 2.6m tonnes. The Indonesian
government plans to begin road tests for B40 in Feb 22.

Acknowledgement of its commitment to ESG. Wilmar has strong environmental, social and governance (ESG) and it is one of the earliest companies to launch the No Deforestation, No Peat, No Exploitation (NDPE) Policy for palm supply chains in 2013, extending it to sugar in 2021. Its ESG efforts are being recognised with the recent upgraded to an “A” rating (from BBB) for its ESG performance in the 2021 assessment by Morgan Stanley Capital International (MSCI). Besides this upgrade, other sustainability achievements of Wilmar in 2021 include: a) inclusion in the Dow Jones Sustainability Indices (DJSI) World Index for the Food, Beverage and Tobacco industry grouping for being among the top global companies with the best ESG performance, b) inclusion in the FTSE4Good Developed Index and the FTSE4Good ASEAN 5, and c) Wilmar was also ranked number one in the 2021 assessment by the Sustainable Palm Oil Transparency Toolkit (SPOTT), with a total score of over 91% for its transparency and public disclosure on its policies and efforts related to ESG matters.

Adani-Wilmar IPO listing slightly delayed. Adani-Wilmar has started its IPO roadshow and but the listing has missed the earlier guided timeline (by Dec 21). The IPO proceeds will be mainly used to fund AWL’s expansion in India, in particular to expand their product range, which will eventually mirror the business model in China. We do not expect any special dividend from this listing. However, the easing of the capital needs from the holding company may lead to higher dividend payout in the future.

EARNINGS REVISION/RISK

Maintain earnings estimates. We maintain our 2021/22/23 earnings forecast of US$1.71b, US$1.79b and US$1.96b respectively.

VALUATION/RECOMMENDATION

Re-iterate BUY with target price of S$6.00 (previous: S$6.40). Fair value is derived from SOTP by pegging a 2022F PE of 19x for China operations and a blended 11x PE for non-China operations. Despite the short term concerns that China’s economy is still weak, and concerns about COVID-19 restrictions weighing on domestic consumption, we re-iterate BUY on Wilmar for its diversified and integrated business model which has delivered good results performance despite the global uncertainty in 2020 and 2021 amid the COVID-19 pandemic.

SHARE PRICE CATALYST

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