Broker's take: CGS-CIMB keeps 'add' on Wilmar, says Chinese unit's value underestimated

CGS-CIMB on Friday maintained its "add" call on Wilmar International despite a short-term overhang from this week's share sale by major stakeholder Archer Daniels Midland (ADM), adding that it remains positive on the planned listing of Wilmar's Chinese unit, Yihai Kerry Arawana (YKA).

CGS-CIMB also maintained its target price at S$5.53. Shares of the agri-food giant were trading at S$4.43 as at 11.58am on Friday, up S$0.07 or 1.1 per cent. The counter was the most actively traded by value on the Singapore bourse on Friday, with 10.7 million shares changing hands.

ADM, Wilmar's second-largest shareholder, on Wednesday announced it had sold 170.5 million shares representing a 2.68 per cent stake in Wilmar, with the settlement of the block trade expected to occur on Aug 24.

The shares were sold at a placement price of S$4.40, a 9.5 per cent discount to Wilmar's closing price on Wednesday. Analysts Ivy Ng and Nagulan Ravi said they believe this was to allow ADM to unlock the value of its investments in Wilmar given the "strong" share price performance year to date, estimating that the transaction would raise around US$550 million in gross proceeds for ADM.

Wilmar shares sank more than 10 per cent on Thursday in response to ADM's announcement. The analysts said they believe this was due to concerns over share overhang from the placement of Wilmar shares.

However, they remain positive on Wilmar on YKA's upcoming listing. Wilmar on Thursday said YKA had submitted an updated prospectus to the China Securities Regulatory Commission (CSRC) for final registration approval for listing on the Shenzhen Stock Exchange ChiNext Board.

Final registration approval from CSRC is pending, it added.

The analysts said the market could be underestimating YKA's potential value, which is set to be unlocked upon its listing. Earlier this month, YKA said it expects to post a profit of between four billion yuan (S$788 million) and 4.6 billion yuan for the nine months ended September, a year-on-year increase of between 15 per cent and 30 per cent in YKA's bottom line.

Other catalysts for the stock include Wilmar's "favourable" earnings prospects in 2020, and a potential special dividend, they added.