Key takeaways from 1Q results briefing
? Wilmar could post better qoq earnings in 2Q due to stronger YKA earnings.
? We do not expect the palm oil export ban to impact its earnings significantly.
? The value of stakes it owns in YKA and AWL worth more than its market cap
Positive takeaways from the results briefing
? Post Wilmar’s 1Q results briefing today, we stay positive on the group as we expect
sequentially stronger 2Q core net profit (excluding one-off gains from AWL’s listing).
Despite the tough operating environment, Wilmar expects its FY22 earnings to be
satisfactory. Key positive takeaways from the briefing: (1) Wilmar expects the pretax
profit of its food products segment to improve qoq as it had raised the ASP of its
consumer products in 1Q22 to reflect higher raw material costs. This segment will also
benefit if commodity prices reverse its current uptrend. (2) Its soybean crushing margin
has improved in China. It expects its soybean crushing business in China to return to
profitability in 2Q vs. losses in 1Q22. (3) Its new central kitchen in Hangzhou China
commenced operation in Apr; another four such facilities are under construction in
Chongqing, Langfang, Xian and Zhoukou. It expects the central kitchen business to
boost its earnings over time. (4) Wilmar will sell another 6.5% stake in Adani Wilmar
Ltd (AWL) within three years of the latter’s listing (8 Feb 2022), after a one-year
moratorium. It could book additional exceptional gain from the sale. In 1Q22, Wilmar
had booked a gain of US$175.6m on the dilution of a 6% interest in AWL following its
listing. AWL’s share price has surged 311% to Rs715.95 from its IPO price of Rs230.
Potential impact from Indonesia’s temporary export ban on palm oil
? Wilmar said the export ban on CPO, RBD Palm Oil and RBD Palm Olein from
Indonesia effective 28 Apr is likely to be temporary as Indonesia produces more palm
oil than its domestic needs. The group expects the export ban to be lifted once there is
adequate supply of cooking oil domestically. The export ban is likely to be negative for
upstream producers and neutral for domestic cooking oil producers in Indonesia.
Wilmar said it still has storage capacities in Indonesia and can continue to buy FFB
from farmers for processing. The Indonesian government currently provides subsidy
for bulk cooking oil from the CPO Fund, with the retail price of bulk cooking oil capped
at Rp14,000/litre. Wilmar sells around 500,000 tonnes of bulk cooking oil in Indonesia.
The temporary export ban is likely to alter the timing of palm oil export shipments from
Indonesia, benefitting palm oil producers outside Indonesia in the near term. The
potential earnings impact from this ruling on Wilmar will be dependent on when the
government lifts the export ban; we predict in a month’s time. As such, we do not
expect the potential earnings impact on Wilmar to be significant. Wilmar said it has
complied to all export permit regulations in Indonesia and intends to cooperate with the
Attorney General’s investigation on palm oil exports. The commissioner of its
Indonesian unit has been detained but no charges have been filled.
Other interesting takeaways; reiterate Add
? Recent Covid-19 lockdowns do not significantly impact Wilmar’s China operations, but
the slowing Chinese economy has affected demand for premium brands. It has
suspended the operations of one of its JV plants in Ukraine due to the Russia-Ukraine
conflict. The JV’s other plant in Ukraine is partially operational. Wilmar said possible
options to unlock shareholders value include selling additional shares in listed
subsidiaries, buying back shares, distributing some of its shares in listed subsidiaries
to Wilmar shareholders, or taking Wilmar private. Of these options, we think the more
imminent scenarios are share buybacks (Wilmar bought back 3.6m shares today) and
sale of another 6.5% stake in AWL. We keep our Add call on Wilmar due to its
attractive valuations (CY22F P/E of 11x) and dividend yields of 3.9%. The stock offers
28% upside to our SOP-based TP of S$5.68 (implied P/E of 15x). Wilmar is
undervalued as the current market value of its 90% stake in Yihai Kerry Arawana and
44% stake in AWL of US$38.3bn is 89% higher than its market cap of US$20.1bn.