Wilmar International - Aiming for recovery in 2H23
- Earnings could bounce back in 2H23 and 2024
- Branded consumer products and central kitchen business will be Wilmar next growth driver in China
- Refining and crushing businesses are strong pillars for Wilmar downstream expansion
- Maintain BUY with lower TP of S$5.30
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Earnings set to recover in 2H23 and 2024
We revised down our FY23 earnings forecast by 15% to US$1.7bn (-29.6% y-o-y) to account for weaker than expected earnings in 1H23 mainly on low palm oil refining profit and slower than expected recovery in China’s economy. Earnings have retreated from its 2022 peak on the absence of unusually high commodity prices at its mid-stream and upstream divisions mainly tropical oil.
We account soft 1H23 earnings performance as we reckon Wilmar’s tropical oil refining margins may remain weak, plus the slower than expected economic recovery in China may hinder major q-o-q earnings performance expansion from food products as well as soybean crushing margin division. After posted relatively weak earnings in 1Q23, we think the situation didn’t improve immediately in 2Q23 as we see the palm oil refining profit margin didn’t improve meaningfully yet.
Our 2023 earnings forecast implies better earnings performance in 2H23. We estimate Wilmar will post around US$500m earnings per quarter, benefitting from a combination of (i) recovering palm oil refining margin, and (ii) stronger China operation mainly on improving soy crushing margin on stronger soymeal demand, as well as improving profitability at its food products division.
Earnings set to improve in 2024 on better overall margins and sales volume trend. We forecast revenue of US$63bn (+5% y-o-y) and net profit of US$2bn (+23.4%) in 2024 on recovering profitability trend , led by better palm oil refining margin. We believe Wilmar will be able to capitalize the improving edible oils market in 2024 on better demand from China, as well as limited supplies expansion due to El Nino.
On pretax profit (PBT) trend, we forecast food products will gradually recover in 2024 on margin recovery and sales volume growth, but the largest profit driver will be the palm oil refining margin recovery from refined tropical oil products on improving palm oil derivative products pricing, as well as normalizing price differential between Indonesia and Malaysia CPO price. Meanwhile we also believe the JVs will do well in 2024, lead by Adani Wilmar steady performance outlook.
We believe Wilmar will enjoy its continuous expansion in downstream food chain in form on more stable and predictable earnings, plus higher margin, and ROE. We believe YKA’s earnings performance will recover on easing cost pressure. YKA had previously raised prices to reflect the higher input cost however, the 2022 commodities super cycle eclipsed the selling price expansion hence it hindered YKA’s immediate profit margin recovery.
Furthermore, Wilmar leads the market for edible oils, oilseeds and grains crushers and its rice and flour operations will provide a strong foundation for its downstream business expansion to food products, and central kitchen business via synergies to its existing operations such as logistics fleets.
YKA’s profitability has been hurt by cost escalation as seen in its quarterly gross profit margin trend. Easing commodity prices from last year’s high will provide room for margin improvement in upcoming quarters, albeit YKA had still booked weak 1Q23 core net profit (excluding hedging related gains).
YKA’s earnings contribution to overall Wilmar’s consolidated earnings has been decreasing since its listing due to rising material costs. However, a further drop in YKA earnings due to worse than expected circumstances will have a minimal impact on Wilmar’s overall earnings from 2Q23 onward, since right now it only accounted 9% of Wilmar’s total core net profit in 1Q23.
Central kitchen business could be a game changer in the long run
We believe the central kitchen business is a game changer. The central kitchen business offers ready-to-eat meals by launching series meal products spanning from student meals, nutritional meal, and functional foods.
Wilmar will leverage on its advantage of a wide range of oil and grains products and its existing logistics network. This will generate higher revenue on improving sales volume and margins since the central kitchen segment will be able to leverage on Wilmar’s existing logistics and its solid grains and oilseeds businesses.
Wilmar will add 20 central kitchens in China in the next 5-6 years with capex of US$60m-US$100m. Since we see central kitchen is a high turnover business, we estimate each central kitchen could generate up to US50m in turnover and up to US$10m - $15m in profit in a full year of operations as ingredients can be sourced internally while leveraging on Wilmar’s existing logistics network. It is estimated that the central kitchens could contribute up to US$300m of earnings by 2027 if the synergies with its existing operations materialized. More importantly, it will add significant value to its non-branded, bulk food division mainly on the increasing brand awareness on Wilmar’s consumer product lines in China, in our view which will generate more sales.
Maintain BUY with lower TP of S$5.30
We maintain our BUY rating with PE multiple based TP of S$5.30. We reiterate our believe that Wilmar’s ongoing transformation to an integrated food product player is under-appreciated at this point. While the downstream platform is far from mature and Wilmar earnings is still volatile following the edible oil price dynamic due to its exposure to refining business however, we think the investment set to put Wilmar apart from its peers both from in food processing and consumer product spaces with integrated business model and Wilmar’s scale will create a more stable platform that will be ready to cope with external volatility in the future.
We used FY23/FY24 blended earnings to capture earnings recovery trend between the years and applied different multiples to earnings from China and non-China operations. We pegged the non-China operations at 12x PE multiple to reflect that Wilmar’s earnings are still dependent on its palm oil integrated business despite Wilmar expanding to refining and branded cooking oil.
Meanwhile we pegged China operations earnings at 16.5x PE multiple, a discount to consumer branded products peers multiple in China, and even to Indonesia’s Indofood CBP PE multiple of 21x. We believe Wilmar’s exposure to crushing and refining margin volatility and the impact on its earnings drove us to peg a lower multiple despite its continuous investment to expand further downstream to food products and central kitchen business to create a more stable earnings generator platform in the Group.
Our target price implies FY24F PE of 12x, which is undemanding in our view considering its largely in line with Wilmar’s upstream palm oil plantation peers, meanwhile in reality Wilmar is among the largest FMCG companies in India under AWL. Beyond its leading position as an edible oil refiner, AWL leads in branded cooking oil in India namely Fortune. India’s exposure is hidden under its JV structure, a lesser-known presence vs. Wilmar in China via its Arawana brand and Indonesia with its Sania product line.
What moves Wilmar share price?
Downside risk is minimal at this point since share price has been trading sideways since 3Q22 despite Wilmar consistently delivers profit. We think the earnings shift to midstream and upstream amid rising commodity prices was one of the reasons why the multiple had de-rated back to plantation PE multiple territorypost YKA listing.
YKA market capitalization is 1.5x now larger than Wilmar which means that Wilmar is a cheaper proxy to YKA. We think investors should look beyond YKA’s short term earnings performance since Wilmar is building a stronger integrated platform to expand its exposure to consumer downstream products and it will reward Wilmar upstream and midstream division, too, since YKA journey to become a leading food player require logistics and ingredient procurement, that Wilmar has strong business presence right now.
Wilmar’s share price has been moving in tandem with CPO prices for so many years due to general perception that Wilmar is a giant palm oil companies and the division saved its overall earnings performance in 2021-2022. While Wilmar is no longer a pure palm oil plantation companies anymore, we believe improving palm oil price will provide a positive catalyst to its share price since higher palm oil price will benefit Wilmar on better performance from the plantation and tropical oil refining division.
Meanwhile, we think Wilmar share price also will improve from recovering oilseeds and grains crushing businesses. Wilmar share price relationship with China crushing margin trend has never been straight forward as historically Wilmar could outperform the industry due to its capability in sourcing soybean from various countries such as the US, Argentine and Brazil which enable Wilmar to lower its input cost and stay profitable even during the weak soymeal demand environment.
Wilmar is also exposed to weaker than expected soymeal demand in China currently, which is impacting the whole soybean crushing industry. However, given its strong presence in branded cooking oil division, Wilmar also still can capitalize on the steady edible oils demand via soybean oil availability, and its refined tropical oil division which set to recover ahead. During these challenging times, we reckon it will cut crushing appetite from competitors thus, help the crushing margin to recover ahead before it severely impacts Wilmar’s earnings performance.
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