Wilmar International: Consumer products regained traction
- Wilmar is trading below its five-year average PE multiple of FY24F 9.1x, close to palm oil stock territory
- Profitability improvement in 3Q23 could signal we are pass inflexion point for better earnings outlook ahead
- Lowered FY23F/FY24F earnings forecast, but projections still offers 19% CAGR FY23F-25F
- Revised TP to S$4.30 and maintain BUY on earnings recovery potential in 2024
Related Stories
- Wilmar International Ltd: <Result First Take> Anticipating profitability improvement from 2Q24 onward30 Apr 2024
- Wilmar International: <Result Analysis> Lower input cost kicks in , margin recovery on the horizon22 Feb 2024
- Wilmar International Ltd: Result First Take: Earnings bounced 66% q-o-q in 3Q23 however, still fell short of our expectation26 Oct 2023
Our palm oil refining margin assumption for 2024 is modest due to limited differentials between Indonesia and international CPO prices as well as pressure from sunflower oil. This resulted in a 24%/17% downward revision to earnings, to US$1.28bn (-46.8% y-o-y)/US$1.73bn (+34.9% y-o-y). We also assume higher financing cost in 2023-2025 since the rising interest rate trend means Wilmar’s working capital will be pricier, and that impacts its financing expenses and overall profitability. Given the low base effect in 2023 and profitability improvement in 2024-2025, we forecast Wilmar’s earnings would have a 19% CAGR in FY23-25F.
Meanwhile, the y-o-y earnings improvement in 2024 will be driven by recovering sales volumes of food products and tropical oils. Higher food product sales volumes is projected to propel a further recovery in profitability in 2024. Meanwhile, we assume the palm oil refining margin to recover by 2025. We believe feed and industrial products will rebound on improving soymeal demand and refined palm oil products, even though the palm oil refining margin is likely to stay below the 2022 record-high level.
3Q23 earnings started to show improvement in food products division.
While 3Q23’s earnings represented an expansion of 66% q-o-q, it was below our initial expectation. However, we are starting to see the lower input costs aiding in Wilmar’s profitability improvement, especially in the food products division in 3Q23. Furthermore, crushing divisions also performed well amid tight soybean supplies in China. Meanwhile, the tropical oil division was still impacted by the persistently weak palm oil refining margin in 3Q23.
Stellar top-line performance was driven by strong sales volume of food products, reaching 8.3m MT (+7.9% y-o-y, +12.5% q-o-q). Meanwhile, tropical oils, oil seeds & grains, and sugar sales volumes reached 6.7m MT (+11.7% y-o-y, +23.1% q-o-q), 6.2m MT (+10.8% y-o-y, +1.2% q-o-q), and 3.6m MT (+18.3% y-o-y, +40.2% q-o-q), respectively. Overall revenue reached US$910/MT (+8% y-o-y, +25.9% q-o-q), reflecting that Wilmar sold more higher value products in 3Q23.
We see room for an earnings improvement in 2024 despite acknowledging that the q-o-q earnings expansion in 3Q23 is insufficient to achieve our prior earnings forecast. Sales volumes in the food products division are returning, and that is crucial, since food products have a higher gross profit margin vs. other segments, while also having more stable profitability characteristics than tropical oils and the crushing business.
Lower TP to S$4.30 and maintain BUY rating – we think the market is undervaluing the prospects of recovery in Wilmar’s profitability ahead.
We derive our target price of S$4.30 based on 14x PE multiple to blended FY23/FY24F earnings. We believe our PE multiple assumption is fair, as it is only slightly higher than its plantation universe peers’ FY24F average PE of 10x. We believe Wilmar should be trading above its upstream palm oil peers due to its comprehensive refining facilities in Indonesia and overseas. Meanwhile, Wilmar’s position as one of the largest palm oil exporters in Indonesia provides it some advantages, mainly in procuring CPO at competitive prices.
Our target PE multiple is at more than a 50% discount to consumer and condiment companies’ peers, especially in China, which is now trading around FY24F PE of 21x-30x. We believe profitability and ROE expansion are crucial catalysts to driving Wilmar’s share price performance and a valuation re-rating to put it close to consumer staples peers’ territory. Meanwhile, its weak earnings trend in 2023 means Wilmar is not fully immune to commodity volatility yet, and so we are now pegging Wilmar’s target PE closer to that of its upstream palm oil peers.
Wilmar valuation summary
Our target price implies FY24F PE of 11.6x, which is largely in line with Wilmar’s five-year average PE multiple of 11.3x, and higher than its current FY24F PE of 9.1x. Wilmar is currently trading at around the level of its upstream plantation peers, which considerably low, as it reflects its earnings volatility due to exposure to palm oil price dynamics.
At the current PE multiple level, we also believe any further delay in earnings expansion from 4Q23 onward is well priced in. Wilmar’s share price was last at this level during the 2020 pandemic, prior to the YKA listing, when the market generally viewed Wilmar as a commodity processing platform only, or just another upstream palm oil company because its earnings were on a downtrend amid weakening commodity prices.
Furthermore, we believe the market undervalues Wilmar’s integrated business model, which will provide long-term benefits for the company to further expand into the downstream division. Despite acknowledging the temporary earnings weakness, we believe Wilmar’s integrated platform is set to benefit the company and its shareholders on the back of profitability and ROE expansion ahead, as its integrated platform allows Wilmar to weather any commodity price volatility much better, as seen in 2018-2022.
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Related Stories
- Wilmar International Ltd: <Result First Take> Anticipating profitability improvement from 2Q24 onward30 Apr 2024
- Wilmar International: <Result Analysis> Lower input cost kicks in , margin recovery on the horizon22 Feb 2024
- Wilmar International Ltd: Result First Take: Earnings bounced 66% q-o-q in 3Q23 however, still fell short of our expectation26 Oct 2023