China Operations Are Showing Improvement
Wilmar’s China operations are showing good improvement in 2Q22, especially the
consumer packs and soybean crushing segments. Thus, the performance of YKA is
likely to be better in 2Q22 than in 1Q22. In addition, the selective palm product export
ban in Indonesia is expected to have marginal impact to the bottom line if the ban is
lifted within a short period of time. The real impact on palm downstream margin is from
the sharp rise in exports levy. Maintain BUY. Target price: S$5.50.
WHAT’S NEW
• Operations in China see improvement vs 1Q22. Recall that 1Q22 core profit excludes the
one-off gain from dilution of Adani Wilmar which was below expectations and the variance
came from poor performance of Yihai Kerry Arawana (YKA). During the briefing,
management commented that YKA’s performance is improving and that it is likely to deliver
a better set of results vs the core net profit of just Rmb114m (~US$17m) for 1Q22. The two
main segments that were badly affected in 1Q22 are showing signs of improvement.
a) Consumer packs: The profit margin is expected to improve with recent weakness in raw
material prices and they managed to increase the selling prices for some of the products
in early-22 (before the lockdown). Even with the recent lockdowns in China, the
management mentioned that their operations would not be much affected as they have
factories all over China. Yet, some of their factories (located near the lockdown regions)
are actually benefitting with higher sales volume observed.
b) Soybean crushing: The improvement of its crushing operations in China is mainly
supported by lower soybean price while seeing better demand for animal feeds on the
back of a recovery in the hog and poultry industries. For 1Q22, the soybean crushing
operation was loss-making.
• Impact from recent Indonesia palm oil export ban. Management is of the view that the
recent Indonesia ban on exports of certain palm products is likely to be temporary and will
be lifted once the cooking oil prices are near to the country’s target of Rp14,000/kg (for bulk
and unbranded cooking oil). This is in line with our view. We understand that the cooking oil
prices have started to drop since the announcement of the palm oil export ban. The
management mentioned that if the export ban is only for the short term, it might not affect
the bottom line too much. On top of that, Wilmar’s cooking oil sales volume is from higher-end cooking oil and hence will not experience much impact. The Indonesian oleocoemical
operations are not much affected by the export ban (which is not included), however, we
expect lower margin due to the higher export duty.
STOCK IMPACT
• Investigation into issuance of export licence in Indonesia. The investigation by the
Indonesian Attorney General’s Office (AGO) in relation to export licences of palm products
are still ongoing. Management mentioned that when the domestic market operation (DMO)
and domestic price obligation (DPO) are still in place in Feb and Mar 22, Wilmar was very
supportive by supplying more that the required cooking oil to the domestic market at a loss.
The management had highlighted that the group firmly believes that 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.
• First CKP in Hangzhou commencing operations. The Central Kitchen Park (CKP) project
is progressing well with the first facility in Hangzhou commencing operations earlier in Apr 2022. It started to provide meals to the quarantined in Shanghai and Hangzhou, and will be
supplying meals for the coming Asian Games in Hangzhou. Overall, the CKP operation is
expected to break even or have small operating losses in the first year of operations.
Besides supplying the ingredients, CKP is also getting rental income from space renting and
warehouses. The other central kitchens in Chongqing, Langfang and Xi’an are progressing
well.
• More potential gain from stake dilution from Adani Wilmar (AWL). The one-off gain from
the dilution of its interest in Adani Wilmar Limited (AWL) amounting to US$175.6m booked in
1Q22 arose from the IPO proceeds with the 6% dilution against the book value. AWL is
required to increase its free float to 25% within three years upon listing, which means Wilmar
still need to dilute another 6.5% of its current holding in AWL after one year of moratorium
and before the end of the third year upon listing (listed on 8 Feb 22). Based on the current
trading of AWL, the potential gain from this 6.5% dilution is estimated at around US$800m or
US$0.127/share.
• Unlocking shareholder value. During the question-and-answer session at the Annual
General Meeting on 21 Apr 22, management in its reply to questions on strategy to unlock
shareholders’ value mentioned that there are several options for Wilmar to unlock
shareholder value, which include listing more of its operations, selling additional shares in
the listed subsidiaries, buying back shares, distributing some of the listed subsidiaries to
Wilmar shareholders or taking the company private. But the company is not actively
pursuing any of these options because it is now busy with many good projects in China,
Indonesia, India and other countries. Yesterday, the company bought back 3,626,600
Wilmar shares from the open market at a price of S$4.40-4.43/share. This was the first
share buy back from the open market in 2022.
EARNINGS REVISION/RISK
• Maintain earnings forecast. We are maintaining our earnings forecast as the shortfall in
1Q22 was made up by the gain from the stakes dilution in Adani Wilmar. Our current net
profit forecast is at US$1.77b, US$1.82b and US$2.0b for 2022, 2023 and 2024
respectively.
VALUATION/RECOMMENDATION
• Maintain BUY with target price of S$5.50. Our target price is derived using the 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 in sourcing of raw materials.