Excerpts from UOB KH report

Analysts: Leow Huey Chuen & Jacquelyn Yow Hui Li

Earnings To Continue Be Driven by Strong Sales Momentum And Steady Margins
Reiterate BUY on strong earnings and with Wilmar’s market cap currently at almost 50% discount to that of its subsidiary, YKA.


Share price: 


Management is not discounting more corporate exercises to unlock value at its subsidiaries.

Despite the special dividend of 6.5 S cents, management had also bought back 18.2m shares.

Maintain BUY. Target price: S$5.35.

Optimistic outlook for 4Q20 and 1Q21. Wilmar International’s (Wilmar) strong sales volume growth in 9M20 will continue for the next six months and this will support good results in 4Q20 and even into 1Q21.

China continues to be the main earnings driver with consumer packs sales remaining robust despite the recovery in sales to the HoReCa (hotels, restaurants & catering) sector (implying less cooking at home).

The recent sharp rise in vegoil prices has minimal impact on Wilmar’s margins as we believe it could have got its feedstock when prices were low.

Oilseeds & grains margins may be marginally lower but well offset by the strong sales volume as the swine population has been growing and is likely to head back to pre-Africa Swine Fever levels in 4Q20.

Sugar will not disappoint this time as better sugar prices should translate into higher profits from sugar plantation and mills, while white sugar premium remains supportive to deliver good sugar merchandising profit.

YKA’s growth plan. With the successful IPO listing, Yihai Kerry Arawana Holdings (YKA) will be able to continue with its aggressive expansion plans by increasing production capacities, exploring new locations, expanding marketing & distribution network and expanding horizontal product portfolio to supply more raw materials to its clientele in China.

YihaiKerryArowana Wilmar9.20Yihai Kerry Arowana productsHowever, management guided that YKA’s geographical expansion in China will start to slow down in three years’ time.

YKA currently has production facilities in 65 locations in China.

Hence, YKA would focus more on expanding its downstream operation.

• Not ruling out more corporate exercises. With the successful listing of YKA in China and the stock trading at good valuation, management is not ruling out unlocking value at its subsidiaries.

In our view, these could include Adani Wilmar Ltd (50:50 joint venture in India) and its large palm operations and consumer packs business in Indonesia as well.

This value enhancement M&A with new share issuance.

Management will also consider using YKA’s equity to embark on value-enhancing M&A in China.

Maintain BUY and target price of S$5.35. Our target price is based on 2021F EPS and reflects a blended 24x 2021F PE for China operations and blended 11x PE for non-China operations.

Huge holding company discount not justifed. Based on last closing prices, YKA has a market cap of US$41.9b vs Wilmar’s US$19.8b.

As a holding company of YKA, Wilmar is currently trading at an almost 50% discount to YKA, which is not justifed.

This has the other divisions appearing undervalued and places Wilmar as a much cheaper entry into YKA.

Full UOB report here

DBS report (here) says Wilmar has consistently posted US$300m-400m earnings per quarter.

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