1Q22 Results Preview: Could See Record Contribution From Palm
Wilmar is scheduled to release its 1Q22 financial update on 29 Apr 22. We are expecting
a core net profit of US$360m-380m (1Q21: US$424m). Key factors leading to a lower yoy
profit are a poorer performance from Yihai Kerry Arawana (YKA) and higher effective
tax rate. In 1Q21, the China consumer packs business has yet to be impacted by the
surge in raw material prices and includes a reversal of MTM losses on hedging
derivatives. Maintain BUY. Target price: S$5.50.
WHAT’S NEW
• Disruptive 1Q22 distorted trade flow and pricing. Wilmar International (Wilmar) is
scheduled to release its 1Q22 financial update on 29 Apr 22. 1Q22 is a tough quarter to do
an earnings estimate, as it was an eventful quarter with most agri-commodity prices surging
to new or almost new highs when Russia started its attack on Ukraine on 24 Feb 22. On top
of that, the flip-flopping policies by the Indonesia government on palm oil domestic
obligations and exports also disrupted the trade flow and distorted the palm oil market
pricing between Indonesia and Malaysia. China’s zero-COVID tolerance policies led to the
lockdown of two major cities, Shenzhen and Shanghai, which are relatively big consumer
markets and will have an impact on Wilmar’s sales in China.
• Expecting lower earnings yoy and qoq for 1Q22. We are expecting 1Q22 core net profit
to be within the range of US$360m to US$380m, which is lower than US$424m for 1Q21
and US$534m for 4Q21. To recap, 1H is usually weaker compared to 2H and based on the
last three financial years, 1H core profit contribution ranged from 34% to 43% of full-year
core profit. 1Q is usually better than 2Q due to festive demand in 1Q. To recap, in 1Q21,
there were two one-off items that boosted earnings, ie reversal of hedging losses and higher
effective tax rate.
• Palm oil – The golden oil now. There is a high possibility that Wilmar’s 1Q22 core net profit
will largely be contributed by its palm-related operations, especially from upstream.
Upstream earnings will be boosted by the strong CPO ASP, while sales volume may be
lower yoy due to lower production and also trade disruption from domestic market
obligations in Indonesia in Feb 22 and early-Mar 22. In addition, India sugar also should see
good contribution on better raw sugar production in India and steady selling price.
Contribution from its China operations is expected to be weak given that the consumer pack
business still suffered from great margin pressure from high raw material prices and
soybean crushing margins have not been good as well.
STOCK IMPACT
• Cooperating in investigation into Indonesia’s export licences. Yesterday, Wilmar issued
a statement with regard to the investigation by the Indonesian Attorney General’s Office
(AGO) in relation to export licenses of palm products. The investigations are still ongoing. In
the statement, Wilmar mentioned that the group firmly believes it has been in compliance
with all applicable regulations at all material times with respect to such licences and intends
to cooperate with such investigations. To recap, in late-Jan 22, the Indonesian government
announced the domestic market obligation (DMO) and domestic price obligation (DPO) to
ensure that exporters fulfilled domestic sales volume before issuance of exports license.
However, there were many changes since then until the full abolishment of DMO and DPO in
late-Mar 22 with the replacement of higher exports levy and direct subsidy to the bulk
cooking oil producers.
• Details of the investigation. The Indonesian AGO has named the Director General of
Foreign Trade of the Ministry of Trade along with three other people from the private sector
as suspects in the alleged corruption case in granting export facilities for CPO or cooking oil.
The three suspects from the private sector are MPT as Commissioner of PT Wilmar Nabati
Indonesia, SMA as Senior Manager of Corporate Affairs for Permata Hijau Group and PT as
General Manager in the General Affairs Section of PT Musim Mas. The suspects were
suspected of committing illegal acts, as follows:
a) There is an agreement between the applicant and the licensee in the process of issuing
export approvals;
b) Issuance of export approvals to exporters whose licenses should have been refused
because they did not meet the requirements, namely:
- Distributing CPO or RBD Palm Olein is not in accordance with the DPO;
- Not distributing CPO and RBD Palm Olein domestically as required in the DMO (20%
which later increased to 30% of total exports).
EARNINGS REVISION/RISK
• Maintain earnings forecasts. We are forecasting a net profit of US$1.77b, US$1.82b and
US$2.0b for 2022, 2023 and 2024 respectively. 2022 core net profit forecast is 6% lower yoy
compared with US$1.89b for 2021 as we are expecting lower earnings contributions from its
China operations.
VALUATION/RECOMMENDATION
• Maintain BUY with target price of S$5.50 derived using SOTP valuation by pegging a
2022F PE of 17x for the China operations and a blended 11x PE for the non-China
operations.
SHARE PRICE CATALYST
• Stronger recovery in China operations.
• Surprise margin upside from the good timing of sourcing of raw materials