Wilmar International (WIL SP) – Expecting a better 2Q22
• 1Q22 net profit boosted by one-off gains
• Expecting better crushing margins in 2Q22
• Navigating through short-term challenges
1Q22 results broadly in line with expectations – Wilmar’s 1Q22 revenue rose 23.2% YoY to USD17.6b while net profit was up 17.8% YoY to USD530.3m, driven by strong contributions from the Plantation and Sugar Milling segment on the back of firm crude palm oil (CPO) prices, and an exceptional gain of USD175.6m on dilution of interest in Adani Wilmar Limited (AWL). Wilmar will need to sell another 6.5% of stakes in AWL in order to have the required free float of 25% within three years from AWL’s listing in Feb 2022, after one year moratorium. This could potentially unlock gains of ~USD800m.
Contributions from Russia and Ukraine are not material – Management mentioned that Wilmar’s contributions from Russian and Ukraine JVs are not material. Its plants in Russia are operating. It has two factories in Ukraine: one is not operating while the other one is partially operational. As commodity prices were pushed higher due to Russia-Ukraine tension, this could benefit Wilmar’s Plantation and Sugar Milling segment. However, high commodity prices are also expected to weigh on Food Products segment’s margin due to higher raw material costs.
Weak crushing margins in China – For the Feed and Industrial Products segment, Wilmar raised the average selling prices in 1Q22 before the lockdown in Shanghai, China. We expect better margins in 2Q22 with the full price impact passing through. With Wilmar’s well-distributed plants and factories in China, we see minimal impact from the lockdown in Shanghai on Wilmar’s operations. However, demand for consumer pack oil was weaker in 1Q22 due to the outbreak of Covid-19 cases in China and the slowdown in its economy. Separately, crush margins were under pressure in 1Q22 due to the sudden and sharp increase in soybeans, as well as lower meal demand due to poor poultry and pig farming margins in China. As prices of poultry increase and volume improves, crush margins have improved and management expects the business to return to profitability in 2Q22.
Impact of palm oil export ban in Indonesia is likely to be limited – Pertaining to the ban on palm oil export by the Indonesian government from 28 April 2022, management expects the ban to be temporary and is likely to see the domestic cooking oil prices ease to the desired level within weeks to two months given ample supply of production vs domestic demand. As such, the impact of the export ban on Wilmar’s tropical oils operations in Indonesia is likely to be limited. Meanwhile, Wilmar’s upstream business in Malaysia (1/3 of production) could benefit from higher CPO prices and partially offset the shortfall from the export ban. We revise our estimates and lower our fair value estimate from SGD5.95 to SGD5.61.
ESG Updates
Wilmar International (Wilmar) was upgraded in Dec 2021, driven by updated water stress data and the inclusion of regional groundwater availability in evaluation of water stress level in China. Wilmar outperforms its peers in terms of governance and environment. It demonstrates strong efforts to mitigate adverse environmental impact of operations relative to peers. However, Wilmar shows limited evidence of efforts to reduce carbon emissions compared to peers. Wilmar lags its peers in terms of social issues with limited evidence of efforts to reduce employee injuries/fatalities. BUY. (Chu Peng)