Brokers’ take: CGS-CIMB maintains ‘add’ on Wilmar, cuts target price as valuations weaken

ANALYSTS at CGS-CIMB have maintained their “add” rating on Wilmar International despite a cut in target price – from S$5.69 to S$4.68 – as the valuations of its listed subsidiaries weaken. 

In an Oct 19 report, CGS-CIMB noted that the food processing and investment holding company saw a 15 per cent decline in share prices to S$3.52 year to date. 

The revised target price therefore reflects the latest valuation of Wilmar’s listed subsidiaries, it said, which includes its Chinese edible oil and grain subsidiary Yihai Kerry at 40 yuan per share, Indian food subsidiary Adani Wilmar at 655 rupees per share, and Indian sugar refining subsidiary Shree Renuka at 62 rupees per share. The target price is also closer to the company’s book value of S$4.39 as at Jun 30, 2022, implying a price-to-book value (P/BV) of around 1.1 times. 

This came even with strong earnings in the first half of FY2022, said CGS-CIMB – likely due to rising interest rates, which could negatively impact its earnings, and a strong US dollar, which might affect earnings that are derived from China and South-east Asia. 

The research house added that although it believes that Wilmar’s long-term business prospects will remain strong, with investments in new facilities expanding the group’s earnings base, market sentiment might be weak because of concerns about inflationary pressures and geopolitical tensions.

If anything, CGS-CIMB expects Wilmar to hit record earnings in FY2022, with a core net profit of US$600 million to US$650 million for Q3. This is in line with the previous quarter’s net profit of US$652 million and an increase from Q3 FY2021’s net profit of US$576 million.

“The third quarter has traditionally been its best earnings quarter, driven by festive demand and seasonally higher palm oil output,” it explained. 

CGS-CIMB also raised Wilmar’s earnings per share forecast by 14 per cent, citing the company’s potentially “better than expected” profit margin, particularly for its tropical oil segment and food product segments.

For instance, Wilmar saw higher export volumes in its tropical oil segment as Indonesia lifted its restrictions on palm oil export, resulting in better economies of scale and downstream margins for the company. The company’s food products segment is likely to show a sequential improvement in earnings from declining raw material costs too, it said. 

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The analysts highlighted that Wilmar currently offers “deep value”, trading at 7.8 times its price-to-earnings ratio and 0.8 times its P/BV, with a dividend yield of 5.8 per cent. This is 1.5 standard deviation points below its 12-month historical mean. 

“We estimate that in the worst case scenario where Wilmar’s share price falls to its previous P/BV low in 2020, the downside to its share price is 6 per cent to S$3.29,” it said. 

Additionally, CGS-CIMB believes that the company’s share price could rerate closer to one to 1.3 times its P/BV, should fears of inflation and geopolitical tensions abate through the delivery of stronger earnings. The potential upside to its share price would then range from 25 to 62 per cent at S$4.40 to S$5.70, respectively. 

“We believe the market has more than priced in (their) concerns,” it said.

“We are positive on the group’s medium-term earnings prospects due to its capacity expansion plans, ventures into central kitchens in China and strong environmental, social and governance practices.”

As at 11.48 am on Thursday, shares of Wilmar were trading up 1.1 per cent or S$0.04 at S$3.59.