• BUY, new SGD5.05 TP from SGD5.10, 17% upside. Wilmar International’s 1H22 performance is in line, with all divisions except for food products showing PBT growth. The stock remains severely undervalued – trading at 10x 2023F P/E, especially as its combined stake in Yihai-Kerry and Adani Wilmar is double the value of its own market capitalisation.

• In line. 1H22 earnings are in line with our and consensus expectations, after excluding the gain on dilution of interest in Adani Wilmar of USD175.6m (included in the food products division), coming in at 50-53% of FY22F projections. Management declared a DPS of 6 sen (1H21: 5 sen).

• In 2Q22, food product sales volumes grew 9.2% YoY or 0.2% QoQ, bringing 1H22 sales volumes to 13.8m tonnes (+3.6% YoY) – driven by the resurgence of COVID-19 infections in China. Excluding the abovementioned gain on dilution, margins fell to 2.17% in 1H22 (1H21: 2.3%) from higher raw material prices. Although Wilmar was able to raise ASPs in China, it was not enough to offset the high raw material prices. Going forward, margins should improve as commodity prices have eased substantially in 3Q – although the impact of this will probably be seen from 4Q onwards, as higher-priced stocks would be utilised first.

• Feed and industrial division saw YoY volumes declining 5.4% in 1H22, although on QoQ basis, volumes rose by 8.6%. The decrease was driven by tropical oils (due to Indonesia’s export ban and Domestic Market Obligation policy), and sugar. However, this was partially offset by higher crushing margins and a higher volume of soybean crushed during the period, as well as prudent procurement of feedstock. We understand that the China crushing business turned around to profitability in 2Q22 (from losses in 1Q22), due to increased volumes. With lower raw material prices, crushing margins have improved, as farming margins have returned to the black. The PBT margin contracted to 2.3% in 1H22 (from 2.8% in 1H21).

• Improved CPO and sugar prices as well as higher FFB output (+3% YoY) mitigated the lower sugar milling volumes (-13.6%) in the plantation and sugar milling division, resulting in margins widening to 20% in 1H22 (from 11.3% in 1H21). Going forward, as prices have moderated, margins may decline. Management believes the recent CPO price decline may have been slightly overdone, but this would depend on how supply improves going forward.

• We trim our net profit forecasts after reducing our tropical oils and sugar sales volume assumptions, to account for the impact of regulatory risks in Indonesia, and lower sugar merchandising volumes.

• Still BUY, with a lower SOP-based TP of SGD5.05. Our TP includes a 2% ESG premium, based on an ESG score of 3.1. We continue to believe Wilmar is undervalued, as its combined stakes in Yihai-Kerry and Adani Wilmar are double its current market cap.

Source: RHB Research - 8 Aug 2022