Brokers' take: CGS-CIMB lowers target on Wilmar; UOBKH, DBS maintain 'buy'

CGS-CIMB has lowered its target price on Wilmar International to S$5.69 from S$6.15 despite its record-high net profit in FY2021.

Wilmar on Tuesday (Feb 22) posted a 24 per cent growth in its core net profit year on year (yoy) to a record-breaking US$1.84 billion in FY2021, 16 per cent above CGS-CIMB's estimates.

In a research report on Wednesday, analyst Ivy Ng said the target price was revised to factor in the market capitalisation of 2 of its subsidiaries, Yihai Kerry Arawana (YKA) and Adani Wilmar.

This comes after YKA posted a 31 per cent yoy fall in net profit to US$647 million, which contributed 34 per cent of Wilmar's net profit in FY2021.

In the near term, Ng sees "mixed signals" as she believes the food product segment could be affected by higher raw material prices, slower demand growth and government regulations to limit price hikes on essential food items.

The analyst also expects challenges to soybean crushing given the higher soybean prices and poor hog farming margins in China. Following the weaker crush margins, Ng projects core net profit to fall by 3 per cent in FY2022.

However, earnings forecasts for FY2022 were raised to reflect higher crude palm oil price and processing margins, Ng said.

With high crude oil prices that Wilmar can benefit from, she remains positive on the company's upstream palm oil business.

According to Ng, Wilmar's mid-to-downstream palm business could gain from higher volatility in commodity prices if it continues to execute timely purchase of raw materials.

Ng highlighted that the brokerage still views Wilmar as attractive and maintained an "add" call on the share.

"We like Wilmar due to its attractive valuations and plans to unlock its value for shareholders," she added.

The analyst said that Wilmar's attractive expected price-to-earnings valuation of 12.3 times and projected dividend yield of 3.6 per cent for FY2022 could potentially re-rate its stock.

In a separate research report on Wednesday, UOB Kay Hian (UOBKH) maintained a "buy" call on Wilmar with a target price of S$6, slightly above DBS' target.

The research team noted that Wilmar's core net profit was way above its expectations but believes food products and soybean crushing operations will still be impacted by higher costs and lower margins in 2022.

UOBKH, nonetheless, is positive that another year of strong performance from its palm operations would offset the potential negative effects.

The brokerage likes Wilmar for its "diversified and integrated business model which has delivered a good results performance despite the global uncertainty in 2020 and 2021 amid the Covid-19 pandemic", it said.

Likewise, DBS maintained its "buy" call and target price of S$6.67 on Wilmar in a report on Tuesday.

The research team said it likes Wilmar on its capability to churn healthy margin and earnings with its integrated business platform.

"We believe Wilmar will continue to post positive earnings growth in 2022, as we believe it can capitalise on the high raw material cost and good vegetable oils refining margin via its extensive refining and manufacturing facilities," DBS said.

The research team believes oil refining will continue to drive earnings in 2022. It also thinks food products will grow on new processing plants and central kitchen business expansion.

In spite of the stronger-than-expected FY2021 earnings performance, DBS maintained its FY2022 core net profit forecast as it believes the estimate reflects the impact of high raw material prices to its seeds and grains crushing operations.

Shares of Wilmar were trading at S$4.55, down 1.5 per cent or S$0.07 as at 11.04 am on Wednesday.