UOB Kay Hian (UOBKH) on Tuesday (Jan 23) cut its target price on Wilmar International : F34 0% by 11.8 per cent to S$3.35 from S$3.80. It maintained its “hold” recommendation on the counter.

The research team expects short-term negative sentiment on the agribusiness group’s share price, given its association with an alleged fraud case that is ongoing.

Wilmar’s China-listed subsidiary , denied allegations on Jan 12 that one of its business units was partially responsible for a fraud that led to a 5.2 billion yuan (S$973.3 million) loss for Anhui Whywin, a state-owned trading company.

The business unit, Guangzhou Yihai, was sued by the public prosecutor as an “accomplice” in contract fraud related to palm oil trades between Anhui Whywin and a privately owned counterparty, Yunnan Huijia Import and Export Co.

In a bourse filing on Jan 16, Wilmar said it does not condone any corrupt practices by any of its employees or officeholders. It also noted that its unit, Yihai Kerry, disagrees with the allegations directed at the company and will defend its right to protect the legal interests of the company and all shareholders.

Three days later, the group acknowledged in a response to Singapore Exchange queries that it should have released its statement earlier but it took the view that the matter was not significant in terms of potential liability for Guangzhou Yihai.

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Wilmar also disclosed the Guangzhou Yihai’s contribution to the group’s financial position. For FY2022, Guangzhou Yihai accounted for 2.2 per cent of Wilmar’s revenue, 1.2 per cent of its net profit and 0.3 per cent of the group’s net assets.

UOBKH believes the matter would have minimal impact on Wilmar’s operations, noting that Guangzhou Yihai’s involvement was mainly as a transit storage provider. However, the matter may raise concerns about governance, despite having marginal financial impact.

After factoring in short-term negative sentiment, the research team now values Wilmar at 18 times earnings versus 25 times previously. It maintained its earnings forecast for FY2023 at US$1.1 billion, US$1.6 billion for FY2024 and US$2 billion for FY2025.

Its new target price of S$3.35 implied a potential upside of 2.4 per cent from Wilmar’s last trading price of S$3.27 as at the midday trading break on Tuesday. Shares of Wilmar were trading 1.8 per cent or S$0.06 lower at the time.

In view of the group’s H2 2023 results release on Feb 21, UOBKH expects Wilmar to beat its expectations.

It projects a core net profit of US$320 million to US$350 million for Q4. This will bring full-year core net profit estimates to between US$1.2 billion and US$1.23 billion, which is 6 to 8 per cent lower than consensus expectations.

“Its operations in China have shown some positive developments; however, these improvements have not been substantial enough to offset the challenges stemming from the palm-refining business,” said UOBKH analysts Leow Huey Chuen and Jacquelyn Yow.