Excerpts from UOB KH report

Analysts: Leow Huey Chuen & Jacquelyn Yow Hui Li

WILMAR International (WIL SP)
3Q22: Record Quarterly Profit; Way Above Expectation

Wilmar reported 3Q22 core net profit of US$797m (+38% yoy, +67% qoq). Results were way above expectation, driven by stronger-than-expected contributions from tropical oil.

Wilmar

Share price: 
S$3.60

Target: 
S$5.50

YKA’s performance in 3Q22 was below expectation where we suspect the negative variance came from lower-than-expected margins from its food products and soybean crushing.

4Q22 is likely to be another good profit quarter, thus we adjusted our 2022 earnings forecast up by 24%. Maintain BUY. Target price: S$5.50.

Wilmar Nodeforest1.21

RESULTS

Way above expectation. Wilmar International (Wilmar) reported core net profit of US$796.7m (+67% qoq, 38% yoy) for 3Q22, another record-high quarterly earnings. 9M22 core net profit was reported at US$1,777m, accounting for 99% of our full-year forecast.

This exceeds our and consensus expectations mainly driven by the strong feed & industrial segment with overall sales volume growing 14% qoq and 9% yoy in 3Q22 and potentially strong processing margins from its tropical oil. Wilmar had also enjoyed higher share of results from its JVs and associates and lower effective tax rate in 3Q22.

Star performer – feed & industrial segment. The feed and industrial products segment remains the star performer with strong sales volume in 3Q22. As Yihai Kerry Arawana’s (YKA) results were disappointing with reported 3Q22 net profit only at Rmb377m (-47% yoy), we reckon that the tropical oil segment was the main contributor to the high earnings. This driven by both higher sales volume and very good palm oil downstream processing margins.

STOCK IMPACT

"We adjusted our 2022 earnings up by 25% to a core net profit of US$2.2b from US$1.8b previously to factor in the strong 3Q22." 

Food products: Higher sales but lower margin yoy. Both food products and the medium and bulk’s segment sales volume had improved significantly qoq in 3Q22, where we reckon that this was supported: by a) the festive season, b) the lockdown of cities in China, as it induces higher demand for consumer pack cooking oil, and c) Wilmar‘s factories still being allowed to operate in most of the lockdown cities by the Chinese government.

Feed & industrial products: Palm oil processing likely to be the main earnings contributor and sugar performance is also catching up as merchandising sales volume picked up in 3Q22. YKA reported net profit of Rmb377m (or US$52m) only for 3Q22, which means the bulk of Wilmar’s earnings would have to come from its tropical oils and some from its sugar division. As highlighted in our preview note, palm processing margins are good as crude palm products prices dropped more than refined palm products and also help with the export levy holidays in Indonesia.

Plantation & sugar milling segment continue to perform satisfactorily with good ASP and higher sales volume. Although CPO prices weakened significantly compared with 1H22, the palm oil upstream is likely to still profitable with better performance coming from its Malaysian operation. Sugar milling also started contributing in 3Q22 as milling season started despite achieving a lower volume.

YKA’s 3Q22 was disappointing. YKA reported revenue of Rmb68.4b (+14.9% yoy) mainly on higher ASP but net profit attributable to shareholders was only Rmb380m (-46.9% yoy). The recovery of feed demand has led to higher animal feed sales, but margins were affected by the high raw materials prices, such as soybean and palm oil. The oils & fats business was also down yoy.

As for the food ingredient segment, the adjustment to the selling prices of some products still did not fully cover the increase in raw material costs, and gross profit margin dropped significantly yoy. Impact from lower raw materials prices after the decline of
soybean and palm oil prices is likely to be reflected in coming quarters.

EARNINGS REVISION/RISK
Adjust 2022 earnings forecasts. We adjusted our 2022 earnings up by 25% to a core net profit of US$2.2b from US$1.8b previously to factor in the strong 3Q22. We do expect the tropical oil segment to continue to deliver a good set of numbers in coming quarters with some improvement from YKA. We adjust 2023 and 2024 core net earnings up 1-4% to US$1.85b and US$2.2b respectively.

VALUATION/RECOMMENDATION
The outperformer amid pandemic years and volatile market. We maintain BUY on Wilmar although 2023 earnings may be lower than 2022 and its integrated business model enables Wilmar to extract the best value from the business value chain. This integrated business model has delivered a stellar three-year CAGR of 21% of core net profit for 2019-22.

• Maintain BUY with a target price of S$5.50. Our target price is derived using the SOTP valuation by pegging a 2023F PE of 17x for the China operations and a blended 11x PE for the non-China operations. The fair value of S$5.50 translates to a blended 2023F PE of 15.3x.


SHARE PRICE CATALYST
• Stronger-than-expected performance from its China operations.
• Surprise margin upside with its strategic procurement activities.

Full report here. 


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