Gradual Recovery
Management’s recent updates are in line with our expectation. We believe the worst is behind us, but earnings recovery is expected to be gradual due to the ongoing geopolitical uncertainty and a slower economic growth environment. During YKA’s recent briefing, management emphasised the recovery of sales volumes, particularly in consumer products, and expressed optimism that this positive momentum will be sustained. Maintain HOLD. Target price: S$3.80.
WHAT’S NEW
• Management’s briefing aligns with our expectation and indicates that the worst may be behind us. However, uncertainties persist due to global economic instability, lower margins in palm downstream processing compared with 2022, and slower growth in China.
• Food products: Set for gradual earnings improvement as high-cost raw materials deplete. Wilmar International (Wilmar) is seeing more sustainable sales volume growth for consumer products in China. The positive sales growth trend is confirmed by Yihai Kerry Arawana (YKA) which reported positive yoy sales volume growth in 3Q23. Lower cost of raw materials also benefits flour and rice operations in China, contributing to improved earnings in 4Q23.
• Oilseeds and grains: The re-emergence of African Swine Flu may lead to lower animal feed demand, potentially resulting in weaker crushing margins. However, margins are still expected to remain positive.
• Tropical oils: Refining and oleochemical margins remain positive but at normalised levels. These margins are significantly lower compared with the extraordinary margins reported in 4Q22 (highest refining margin was in 3Q22). This segment is expected to be the primary drag on Wilmar’s 4Q23 and full-year 2023 financial performance.
• Fertiliser: This division is not expected to report large losses, as fertiliser prices have normalised and high-cost stocks have been depleted. Demand for fertiliser in Indonesia is also rising after a period of price collapse.
• Sugar milling and refining: This segment is performing well, benefitting from high sugar prices and a strong white sugar premium.
