Brokers’ take: Analysts cut Wilmar target price as China growth outlook dims

BOTH DBS Group Research and Maybank Securities have lowered their target prices for Wilmar International , due to expectations of a slowdown in demand from China as the country’s growth outlook weakens.

DBS on Monday (Jul 10) trimmed its target price to S$5.30 from S$6.67, while retaining its “buy” call on the stock. Maybank, which has an unchanged “hold” call on Wilmar, lowered its price target to S$3.99 from S$4.27 in a report on Jul 7.

Both research houses have lowered their near-term earnings forecasts to account for lower contributions from China, which consist mostly of the group’s tropical oil refining business.

“Despite the short-term earnings weakness, Wilmar’s integrated food products platform has room to further expand via its downstream division spanning consumer products to central kitchen,” said DBS analyst William Simadiputra.

Simadiputra said he continues to like Wilmar for its increasing focus on the downstream business, which he believes will “create a more stable earnings platform ahead”.

DBS is projecting Wilmar’s earnings to recover to some US$2 billion in FY2024, up 23 per cent year on year, as the group’s tropical oil refining margins are expected to improve.

It also expects the group to capitalise on the recovering edible oil market next year, driven by demand recovery in China, as well as supply disruption from El Nino.

DBS’ revised target price implies a 12 times price-to-earnings (P/E) multiple based on FY2024 estimates, which factors in the group’s earnings prospects.

In the analyst’s view, any temporary earnings weakness in FY2023 has already been priced in.

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“We believe Wilmar’s current share price, which is close to the pandemic level, doesn’t value Wilmar’s developing integrated food products platform, especially its downstream branded products and central kitchen expansion.”

Maybank said it expects Wilmar’s net profit after tax (NPAT) to “decelerate further” when the group reports its Q2 FY2023 results in August.

This comes on the back of soft services demand in China, and falling palm oil prices which may affect margins, said Maybank analyst Thilan Wickramasinghe.

Such factors should limit Wilmar’s room for positive earnings momentum in FY2023, he said.

Maybank’s lower target price accounts for higher borrowing costs, as well as a target P/E ratio of 26 times.

While Wickramasinghe noted that the stock trades at a forward P/E discount of 78 per cent to its listed Chinese subsidiary Yihai Kerry, and a discount of 83 per cent to its India listing through Adani Wilmar, the analyst said he does not see a catalyst for this gap closing in the medium term.

This is because investors in China and India are able to participate directly in their respective countries’ growth through Wilmar’s listed subsidiaries, he said.

The analyst nonetheless raised the group’s NPAT estimates for FY2023-2024 by 10 per cent to 13 per cent to factor in higher margins in the feed and industrial segment, as well as higher volumes in the plantations and sugar segments due to a seasonally stronger H2 FY2023.

As at 1.04 pm on Monday, shares of Wilmar were up S$0.05 or 1.4 per cent at S$3.72.