Mixed signals on its FY22F prospects
? We sense that 1Q22F earnings are likely to be lower qoq and yoy due to lower crush and food product profit margins as well as seasonal factors.
? The stock remains undervalued on all key valuation metrics. Reiterate Add.
Our key read on FY22 earnings prospects from results briefing
? Wilmar indicated that the current high CPO and sugar prices should benefit its upstream business (palm oil estates and sugar milling business) in FY22F. In FY21, the plantation and sugar milling segment made up 20% of group total pretax profit.
? The group said it can meet the domestic market obligation (DMO) set by the Indonesian government since 27 Jan, where it is required to sell 20% of its planned export to the domestic cooking oil market at a maximum price of Rp9,300/kg for CPO and Rp10,300/kg for olein. The new cooking oil ruling has not affected its palm oil exports volumes. The DMO has negatively impacted its domestic cooking oil profit
margin, but it is able to compensate through a better export margin for palm products. Overall, the group expects its palm oil processing business (mostly in Malaysia and Indonesia) to do well in 2022. The group also guided that soybean crushing will be challenging in view of current high soybean prices and poor hog farming margin in China. These two segments are parked under the feed and industry product segment which contributed 45% of total pretax profit in FY21.
? The high commodity prices will likely negatively impact the profit margin of its food product segment (cooking oil, sugar, flour, rice, noodles and others) as it may not be able to fully pass on the costs to consumers in view of slower economic growth in China. This will be partly offset by higher sales volumes due to expansion of plants and its venture into central kitchen businesses in China. The food product segment reported a 41% decline in pretax profit and accounted for 25% of its total pretax profit in FY21. Wilmar derived most of its food product segment earnings from China.
Other interesting takeaways from the briefing
? The Russian-Ukraine conflict could lead to higher wheat prices, which could affect its flour milling business outside China, if it is unable to pass on higher costs. The higher wheat prices will not impact its flour business in China as the country is nearly self-sufficient in wheat.
? Wilmar is seeing some demand destruction for soymeal and cooking oil in some countries like Africa where the government does not intervene in the market to keep cooking oil prices below the current high market price for commodities.
? The group indicated that it might consider listing other parts of its businesses if beneficial for the group. Apart from unlocking value, listing allows the operations to grow and develop independent teams to manage the companies as they grow with support from Wilmar.
Market underappreciating the value of its parts
? The successful listing of 90%-held Yihai Kerry in Oct 2020 and 44%-owned Adani Wilmar in Feb 2022 allows the group to unlock value. The combined market value of Wilmar’s stake in these two entities is US$45.4bn; 2.1x more than its current market cap. We keep our Add call due to its attractive 12x FY22 P/E valuations and 3.7% dividend yield. The stock offers 23% upside to our SOP-based TP of S$5.69