Brokers’ take: Aletheia Capital initiates Wilmar with ‘sell’, flags debt and earnings risks

ALETHEIA Capital has initiated coverage on Wilmar International with a “sell” call and a price target of S$2.58, citing “faltering returns and poor earnings growth”.

As at the time of the report’s release on Monday (Aug 14), analyst Nirgunan Tiruchelvam noted that this is the first “sell” call for Wilmar, alongside 13 “buy” calls and two “hold” ratings according to Bloomberg.

The price target implies 9.9 times the stock’s EV/Ebitda (enterprise value to earnings before interest, taxes, depreciation and amortisation) multiple based on Alethia’s FY2024 forecasts.

At S$3.81, Tiruchelvam noted that Wilmar is trading at 11.4 times EV/Ebitda, which is slightly higher than the sector median. This premium is unwarranted, in his view.

Among the analyst’s concerns is the agribusiness group’s highly indebted position as at H1 FY2023, which makes the stock’s net debt the highest on the Singapore Exchange.

This would leave the company vulnerable to potential carry trade and interest rate hikes, said Tiruchelvam.

He estimated that the recent spike in interest rates could raise Wilmar’s net interest expense in FY2023 to US$760 million, compared with US$253 million in FY2021.

Although Wilmar’s management stated that such net debt could be set off against its readily-marketable inventory, Tiruchelvam believed this possibility “could be challenged in a potential bear market for soft commodities”.

The analyst also highlighted the “dangerous” unwinding risk of the US dollar-renminbi carry trade.

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“A widening of the US dollar-renminbi carry trade to an interest rate spread of 4 per cent, from 3.3 per cent base case, could cut Wilmar’s FY2023 net income by 16 per cent. A widening to 4.8 per cent could shave off a third of its earnings.”

Lastly, Tiruchelvam said how the stock’s returns have lagged behind its average capital cost for most of the past five years due to “excessive investment” in the refining business.

He foresees this trend continuing into FY2023 to FY2025 amid weak refining and processing margins, as well as higher capital expenditure for its processing assets.

Shares of Wilmar were trading 3.2 per cent or S$0.12 down to S$3.69 as at 1.50 pm on Monday.