Managing Expectations
During the briefing, management conveyed a more optimistic tone compared to the outlook statement. Despite a challenging outlook guidance, Wilmar is poised for margin improvement in 2024 as raw material costs ease and it grows volume by capturing market share from the closure of less competitive producers. The tropical oil division is likely to remain as the most challenging operation with the tightness in CPO supply and stiff competition from cheaper softoil. Maintain HOLD. Target price: S$3.35.
WHAT’S NEW
• More positive tone during briefing. We were fenced off after reading the cautious outlook statement from the results announcement. However, after the analyst briefing, we maintain our view that Wilmar International (Wilmar) will still be able to deliver earnings growth in 2024 despite a more challenging operation environment. The driving factors in 2024 would be: a) margin improvement, as most feedstock prices declined vs 2023, especially compared to 1H23, and b) positive volume growth with a guidance of 5-10% growth yoy.
• Maintain HOLD. Despite the more positive guidance from its briefing vs its outlook statement, we maintain our HOLD recommendation as our current valuation already accounts for potential earnings growth. Additionally, we apply a more conservative valuation for our fair value due to the high volatility in earnings outlook stemming from global geopolitical uncertainties.
• What could make us more positive. We would be more positive if we see: a) stronger margin improvement driven by demand recovery, particularly for palm oil operations and those in China, and b) a clearer resolution of the ongoing litigation and allegations against Yihai Kerry Arawana’s (YKA) subsidiary regarding the recent China palm oil fraud allegations, which the company has denied.
• Reducing capex as cost of funding is no longer cheap; prioritising operational efficiency. In 2024, Wilmar will continue to prioritise operational efficiency improvements, reducing capex as the cost of funding is rising due to the high-interest rate environment. Capex will now largely be funded by internal generating cash flow, as the company strategically manages its investments while extracting benefits from past expansions, particularly those that commenced operations in the last few years. This strategic focus aligns with Wilmar’s commitment to enhancing overall performance and maximising returns on investment.
