Broker's take: DBS says Wilmar deserves a higher valuation multiple than CPO peers

DBS Group Research on Thursday said Wilmar International deserves a higher valuation multiple than its crude palm oil plantation (CPO) peers.

The research house maintained its "buy" call on the agribusiness group, with a raised target price of S$6.67 from S$5.28 previously. This comes as DBS believes Wilmar could top its expectations for the fourth quarter of 2020.

DBS said Wilmar will benefit from the success of its well-established brand, following a decade of investment in its distribution channels and production facilities to deliver steady profit performance.

Analysts noted that Wilmar's current share price does not reflect its presence in commodity-producing countries which will enable it to efficiently produce high-value consumer branded products.

The share price also does not reflect Wilmar's well-established supply chain system and the successful listing of Chinese subsidiary Yihai Kerry Arawana (YKA) with higher valuation multiple than Wilmar's.

Wilmar's strong earnings growth momentum from both its China and ex-China operations should support its share price performance and close the valuation gap with YKA, the research team said.

"Besides its well-integrated platform, we think Wilmar should trade at higher multiples on better market liquidity than YKA," DBS said.

It also raised its forecast for FY2021 earnings to US$1.48 billion, as it expects Wilmar to benefit from strong food demand despite higher input cost potential amid high prices for commodities.

"Wilmar's profitability has been expanding in the last three years and is expected to remain firm from its growing exposure to higher-margin branded grocery food segment," DBS said.

The research team expects domestic consumption of oilseeds and other food products to continue benefiting Wilmar, as the Covid-19 situation in China seems to be under control.

Last week, Maybank Kim Eng raised its target price for Wilmar to S$6.80 from S$5.40 previously. Maintaining its "buy" call, the research team also identified a number of potential upside surprises for the agribusiness group ahead of its Q4 2020 results announcement.

Shares of Wilmar were trading 1.3 per cent or S$0.07 higher at S$5.41 as at 11.27am on Thursday.

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