Its final dividend per share of S$0.10 is down slightly from S$0.11 in the prior year 

 

AGRIBUSINESS Wilmar International : F34 +0.94% posted a 39.4 per cent fall in net profit to US$590.2 million for the six months ended December 2024.

 

The decline was due to the absence of a US$231 million gain in the year-ago period &ndash from the disposal of its Moroccan associate Cosumar &ndash as well as a US$22.8 million net loss from a share swap exercise involving its China associates and joint venture Luhua.

 

Another factor was the &ldquo weaker&rdquo sugar merchandising business, said Wilmar chairman and chief executive Kuok Khoon Hong in a statement on Thursday (Feb 20).

 

The company&rsquo s core net profit &ndash which excludes contributions from joint ventures and associates, as well as non-operating gains from investment securities &ndash was down 43.6 per cent at US$558.2 million.

 

The company proposed a final dividend per share of S$0.10, down slightly from S$0.11 the year before.

 

The lower earnings came even as revenue for the half-year rose 5.3 per cent to US$36.4 billion on stronger sales volumes. Such turnover grew 8 per cent in the food products business, and 15 per cent in the feed and industrial products segment.

 

That said, Wilmar noted that growth was &ldquo partially offset&rdquo by losses in its new food product ventures. Although these are &ldquo not profitable yet, the group believes they will strengthen the long-term potential of its food products segment&rdquo , it said.

 

The feed and industrial products business was also hit by weaker sugar merchandising activities and challenging conditions in the tropical oils business. The segment&rsquo s H2 profit fell to US$295.4 million, from US$527.7 million in the year-ago period.

 

In the plantation and sugar milling segment, challenges included lower sugar prices and a 13 per cent decline in H2 sugar sales volume. Unfavourable weather also led to a 9 per cent decrease in the production of fresh fruit bunches at palm plantations.

 

Nevertheless, higher palm oil prices lifted performance. The plantation and sugar milling segment recorded a 4 per cent rise in H2 pre-tax profit to US$215.3 million, excluding the US$231 million gain from the disposal of Cosumar.

 

For the full year, Wilmar&rsquo s revenue inched up 0.3 per cent to US$67.4 billion. Net profit fell 23.3 per cent to US$1.2 billion, while core net profit was down 25.7 per cent at US$1.6 billion.

 

Looking ahead, Kuok expects the company to increase its market share in the food products segment, with a focus on &ldquo quality and healthy food&rdquo .

 

While he expects palm oil refining to remain challenging, he is &ldquo cautiously optimistic that the oilseeds business will perform satisfactorily&rdquo . This is because a record soybean crop production is expected in Brazil this year.

 

 

Despite seeing continuing underperformance from Wilmar International , UOB Kay Hian analysts Heidi Mo and Llelleythan Tan have kept their &ldquo hold&rdquo call, ahead of the company&rsquo s full year results on Feb 20.

 

However, with expectations of a modest rise in Chinese consumer sentiment to spend on food products and sustained palm oil refining profit margins, they have raised their target price for the stock from $3.00 to $3.18.

 

In their Feb 7 note, Mo and Tan say that Wilmar is likely to report a 4QFY2024 core net profit of between US$330 million ($447.8 million) and US$340 million, versus 3QFY2024&rsquo s US$208 million and, US$424 million recorded in 4QFY2023. 

 

This will bring the company&rsquo s full-year core net profit to between US$1.14 billion and US$1.15 billion, which is 3-4% lower than their forecast and 9-10% lower than consensus expectation.

 

According to Mo and Tan, the company is set to enjoy higher crude palm oil (CPO) prices and improved processing margins. Besides lower fertiliser costs, Malaysian and Indonesian export levy hikes in Nov 2024 have helped drive up overall palm refining margins as well. 

 

Soybean crushing margins also went up due to more demand for meals in wake of tariff threats. 

 

Wilmar&rsquo s China&rsquo s sugar division, on the other hand, is likely to see increased sales volumes but lower margins as increased spendings of the hotel, restaurant and catering (HoReCa) sector prompts for more medium & bulk pack sales. 

 

Negative weather could also put a damper on expected earnings with delayed harvests in areas like Australia where heavy rain this quarter delayed sugar harvests. 

 

There are, nonetheless, several positive attributes for this stock.

 

Last December, Wilmar announced the acquisition of a 31.06% stake in Adani Wilmar (AWL) from its joint venture partner Adani, which will bring Wilmar&rsquo s stake in this India-based business to 74.37% stake. &ldquo This acquisition is expected to significantly enhance Wilmar&rsquo s profitability in 2026&rdquo , suggest Mo and Tan. 

 

They believe that Wilmar will no longer likely pay a special dividend as earlier expected as it channels resources to increase its stake in Adani Wilmar, investors will still enjoy a &ldquo decent&rdquo dividend yield. &ldquo We deem this as an opportunity to accumulate,&rdquo the analysts say.

 

In another positive sign, Kuok Khoon Hong, Wilmar&rsquo s chairman and CEO has continued with his regular share purchases. In 4QFY2024, he paid between $2.99 and $3.10 per share to buy back a total of 8.8 million, demonstrating the manager&rsquo s rather confident stance on Wilmar International&rsquo s outlook.

 

Due to &ldquo modest&rdquo improvement seen in consumer sentiment in China, Mo and Tan have raised their PE peg for the food ingredient business from 16x to 17x. They are however, keeping their peg PE of 11x for both feed & industrial products and plantations & sugar mills business segments. 

 

 

Among the various component stocks of the Straits Times Index (STI), Wilmar International &rsquo s share price, down 10% over the past year, has not been inspiring, so to speak. It did better than the beaten down REITs and property names but was nowhere near the surge enjoyed by the banks and specific industrial names such as Yangzijiang Shipbuilding. If seen over the past three years, Wilmar is down by a heftier 30% or so.

 

Nirgunan Tiruchelvam of Aletheia Capital had earlier pointed out that Wilmar is vulnerable to the unwinding of the carry trade in previous reports and also has to bear with &ldquo excessive&rdquo leverage and poor returns.

 

Recently, he has turned bullish on Wilmar following its announcement on Dec 30, 2024 that it will be taking control of a Bombay-listed joint venture it now runs runs with Adani, its partner in India. The joint venture is called Adani Wilmar and is a leading supplier of cooking oil, flour and other food ingredients in India. From an existing stake of 44% in Adani Wilmar, Wilmar will increase its stake to 75%, as Adani prefers to focus on other business areas. &ldquo Adani Wilmar is at the core of India&rsquo s food sector,&rdquo says Tiruchelvam.

 

Along with improving operating margins, and an indicative dividend payout at a yield reaching a &ldquo historic high&rdquo , Tiruchelvam has in his Jan 10 note upgraded his call on Wilmar to &ldquo buy&rdquo from &ldquo sell&rdquo previously, along with a target price of $3.54, up from $2.10. &ldquo The stock has fallen by 30% since our initiation in August 2023. These risks seem to be priced in,&rdquo he says.

 

All in, Tiruchelvam has raised his ebitda forecasts for Wilmar by 9% for the current FY2025 and FY2026 due to improving margins. According to the analyst, margins were held low in FY2023 and FY2024 because of overcapacity. He notes that inventory levels of soybean oil are now at the lowest since 1976, and this business can be seen to become more profitable. &ldquo The improved prospects for the core soy processing business is the cause for optimism,&rdquo he adds.

 

Investors are duly &ldquo paid&rdquo as they wait for possible upside. Wilmar has maintained a track record of paying pretty generous dividends. After paying a total of 12.5 cents for FY2019, Wilmar increased the payout to 19.5 cents for FY2020, 15.5 cents for FY2021, and 17 cents each for FY2022 and FY2023. The company has already maintained an interim dividend of 6 cents for 1HFY2024 &mdash the same as what the company paid for FY2022 and FY2023.

 

To put it another way, Wilmar&rsquo s payout ratio has been maintained at between 40% and 55% in the last decade. The indicated dividend yield of 5.5% is at a record high, points out Tiruchelvam.

 

There is also a fundamental gap in the market valuation. Yihai Kerry Arawana Holdings Co, Wilmar&rsquo s separately listed subsidiary in China, has a market value of around RMB160 billion, or $30 billion. Based on Wilmar&rsquo s near-90% stake, that is a market value of around $27 billion. In contrast, Wilmar&rsquo s own market cap is a tad below $20 billion, which means the market has ignored the value of Wilmar&rsquo s other businesses including Adani Wilmar, which, based on Wilmar&rsquo s 44% share, is valued at $1.76 billion.

 

Also, investors can rely on the company&rsquo s chairman and CEO Kuok Khoon Hong for support. He is known for buying up additional shares of the company from the open market and has been observed to do so, especially when the share price trades at around $3. In effect, he has drawn a line in the sand that this is the floor, which was last seen back in 2009. &ldquo The chances of insider buying are strong due to the falling interest rates. The dividend yields are even more attractive due to the possibility of rate cuts,&rdquo says Tiruchelvam.