2021: Another Record Earnings Year; Results Beat Expectation
Wilmar’s 2021 core net profit came in way above our and consensus expectations, thanks to extremely strong earnings from its palm-related businesses. Having said that, food products and soybean crushing operations were affected by the high raw material costs and lower crushing margins and volumes. We reckon both segments would still be impacted in 2022, but this would be fully offset by another year of
strong performance from its palm operations. Maintain BUY. Target price: S$6.00.
RESULTS
• Above expectation. Wilmar International (Wilmar) reported core net profit of US$1,110m (+52% hoh, +31% yoy) for 2H21. This brings total core net profit for 2021 to RM1,842m (+24% yoy), which is well above our and consensus expectations. The upside surprise mainly came from the super strong earnings from palm-related business which performed extremely well in 2H21.
• Proposed final tax-exempt dividend of S$0.105/share. Including the interim dividend of S$0.05/share, total dividend for 2021 is S$0.155. This is Wilmar’s highest cash dividend since its listing, bringing a total dividend yield of 3.34% for 2021.
• Segmental performance. Palm-related operations were the star performers for 2021, as they were able to fully offset the lower earnings from Yihai Kerry Arawana (YKA).
a) Plantation & sugar milling: Profit doubled hoh and yoy on the back of firmer oil palm and sugar prices.
b) Feed & industrial products: Strong PBT growth was contributed largely by palm related operations on the back of good refining margins and sustained demand for midstream tropical oils products, as well as steady contributions from sugar merchandising activities. However, soybean crushing margins were thin along with lower sales volume for soybean crushing activities.
c) Food products: Earnings were lower hoh and yoy, due to the high raw material cost where the high raw material costs are not able to be passed down to the end customers as most consumer products sold by Wilmar are staple foods.
• YKA results. YKA posted a 31% yoy drop in 2021 net profit as the kitchen food segment experienced lower margin due to the continued increase in raw material costs despite higher sales volume and adjusted product pricings. For the feeds and oils & fats division, higher profit from the oils & fats division was offset by lower profit from soybean crushing operation. Soybean crushing margins declined in 2021 due to lower crushing volume on weaker feeds demand. In addition, there were some losses from the soybean hedging instruments.
STOCK IMPACT
• Outlook for 2022. Management is expecting better sales volume for the food products segment from the completion of plants expansion and the central kitchen business to commence operations in China this year. Soybean crushing will be challenging with high soybean prices and poor hog farming margins in China. Palm processing, palm plantation and sugar milling segments should perform well on the back of current strong prices.
• Central kitchen would be the largest project in China for the next 4-5 years. The high rental cost, labour cost and difficulty in retaining chefs have driven up the demand for central kitchens. Wilmar is in a good position as it has land to construct integrated complexes. Wilmar will open up its central kitchen to rent to other players. Wilmar’s central kitchens share the same distribution channels and hence the cost is shared among all the products that go to same clients. Partners can also leverage on Wilmar’s central buying of raw materials to reduce cost. This would contribute to earnings once operations commence.
EARNINGS REVISION/RISK
• Maintain earnings forecasts pending the update from today’s briefing. Our current earnings forecast for 2022 and 2023 are US$1.68b and US$1.85b respectively. Our 2024 earnings forecast is at US$2.0b.
VALUATION/RECOMMENDATION
• Maintain BUY with target price of S$6.00. 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 reiterate BUY on Wilmar for its diversified and integrated business model which has delivered a good results performance despite the global uncertainty in 2020 and 2021 amid the COVID-19 pandemic.
SHARE PRICE CATALYST
• Better-than-expected earnings.
• Embarking on value-enhancing M&A.