4Q23 Results Preview: Uncertainty To Cap Performance
Wilmar will be releasing its 2H23 results on 21 Feb 24 after trading hours. We estimate core net profit at US$320m-350m and full-year core net profit at US$1.20m-1.23m, which is 7-10% higher than our but 6-8% lower than consensus expectations. Expect short-term negative sentiment from the recent announcement of its association with the ongoing alleged China palm oil fraud. Maintain HOLD with a lower target price of S$3.35 (previously S$3.80).
WHAT’S NEW
• 4Q23 results preview: Likely to beat our expectation. Wilmar International (Wilmar) will be releasing its financial results for 2H23 on 21 Feb 24 after trading hours. We are expecting 4Q23 core net profit to be within US$320m to US$350m (vs 3Q23: US$324m, 4Q22: US$467.6m). This will bring full-year core net profit to US$1.20m-1.23m, which is 7-10% higher than our but lower than consensus’ expectations. Its operations in China have shown some positive developments; however, these improvements have not been substantial enough to offset the challenges stemming from the palm refining business.
• Mixed segmental performance, with yoy performance still hampered by poor palm refining margins. However, its China operations are expected to show qoq improvement, driven by enhanced margins for consumer packs and soybean crushing. Expectations for each segment are as follows:
a) Plantation & sugar milling. This segment is expected to contribute better PBT yoy and qoq. The yoy improvement can be primarily attributed to the absence of losses from the fertiliser division. Meanwhile, sugar milling is expected to report higher profits due to higher sugar prices. Profit margin from palm upstream is expected to improve qoq as fertiliser costs have declined.
b) Feed and industrial products. Margins for this segment may continue to be soft, especially for the tropical oil sub-segment, given the competitive market and the tight CPO supply situation in Indonesia that has led to higher feedstock costs. Oilseeds and grains margin is also expected to be soft due to slower hog consumption in China, resulting in lower soybean meal demand.
c) Food products. The soft Chinese economic environment is expected to result in a decrease in sales volume of food products. However, a marginal qoq and yoy improvement in margin is anticipated for 4Q23, mainly attributed to lower raw material costs. Notably, the profitability of this segment for 9M23 was impacted by high raw material costs, with key feedstocks mostly sourced at higher prices in 2022.
STOCK IMPACT
• China palm oil fraud allegation likely to have marginal financial impact but may raise concerns on governance. We anticipate a minimal impact on Wilmar’s operations amid the recent allegations of China palm oil fraud. It is worth noting that Guangzhou Yihai’s (Wilmar China’s subsidiary) involvement was mainly as a transit storage provider and it has denied any knowledge of fraudulent activities, emphasising its limited role in cargo storage without involvement in changes to cargo rights or any falsification of transfer documents. Despite this, short-term negative sentiment on the company’s share price is anticipated, given its association with this ongoing pending alleged corruption case.
• Delayed announcement of investigation. In a statement issued by Wilmar, Wilmar mentioned that the investigation of the palm contract fraud involving Anhui Whywin International Co and Yunnan Huijia Import & Export Co, was initially focused on Liu Degang, a former general manager of Guangzhou Yihai who was alleged to have been bribed. Only on 8 Jan 24 did Guangzhou Yihai learn of its impending charge for assisting in an offence through a call from the local prosecutor’s office. YKA promptly issued an announcement on 12 Jan 24, complying with China listing rules, which mandate the disclosure of all criminal charges against YKA or its subsidiaries, regardless of materiality.
• Financial impact. Based on the clarification by Wilmar (replying to SGX queries) the contribution of Guangzhou Yihai, a wholly-owned subsidiary of YKA, to the financial position of YKA and the Wilmar group is stated in the table below, based on the latest audited financial results for FY22.
EARNINGS REVISION/RISK
• Maintain earnings forecasts. We maintain our 2023-25 earnings forecasts at US$1.12b, US$1.56b and US$1.95b respectively.
VALUATION/RECOMMENDATION
• Maintain HOLD with a lower target price of S$3.35 (previously S$3.80), where we have lowered our PE valuation for its China operations from 25x to 18x to factor in the short-term negative sentiment from the recent announcement of its association with the ongoing pending alleged China palm oil fraud.
SHARE PRICE CATALYST
• Greater recovery in China. As YKA is still the largest profit contributor to Wilmar, a surprise recovery would be positive to earnings and market sentiment towards Wilmar’s performance.
• If Wilmar is definitively cleared from any association with the China palm oil fraud, we anticipate a favorable trajectory for the company’s share price. Such a resolution would likely mitigate apprehensions, contributing to a restoration of investor confidence in the company’s corporate governance.