December 10, 2019

Ytd, Wilmar’s share price has risen by about 35.7%. This is the best performing year since 2009. The listing of its China operation under Yihai Kerry Arawana (YKA) is not the sole factor that contributed to the performance; the good earnings for 9M19 also came as a surprise to the market and led to earnings upgrades.

We expect 12% net profit growth for 2020 with bulk of the growth to come from oilseeds & grains. 2020 will see the return of this division as the main earnings contributor (43% of 2020F PBT vs 34% of 2019F PBT). The earnings growth will be driven mainly by better margins and expected higher sales volume from recovery of soymeal demand and growth from rice & flour. China’s demand for soymeal is expected to increase yoy as the hog population is expected to recover from its low in 2019. As highlighted by Bloomberg recently, China plans to reinvigorate its own hog production, and aims to increase domestic supply to 80% of normal levels by the end of 2020, according to Yang Zhenhai, head of the Animal Husbandry Bureau at the Ministry of Agriculture and Rural Affairs (report published 28 Nov 19). Tropical oil’s contribution is expected to decline on the back of lower margins due to a surge in feedstock prices. Good risk management will help to mitigate the impact.

Based on the update from the 3Q19 results briefing, management has guided that the listing of YKA likely to take place in 1Q20. Although this is a slight delay as compared with our earlier expectation of early-Dec 19, it should not be a concern. Based on YKA’s financial summary disclosed in Jul 19, 2018 PATAMI was Rmb5,128m or US$732m (US$1:Rmb7). Based on our estimates, 2019 YKA contribution is likely to be around US$670m-690m, which is not substantially lower yoy. Furthermore, we expect better earnings from China in 2020 with the recovery of soybean crushing margins on the back of better soymeal demand.

Maintain BUY and with higher target price of S$4.75 (previous: S$4.40), as we roll over valuation to 2020F PE and reflects a blended 23x 2019F PE for China operations and blended 11x PE for non-China operations. – UOB Kay Hian

Closing Price: S$4.12