UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow are maintaining their &ldquo buy&rdquo calls and target price of $5.50 on Wilmar International ahead of its results.

 

The agri-business group will be releasing its financials for the 2QFY2022 and 1HFY2022 on Aug 4 after market close.

 

Before the announcement, the analysts are keeping their earnings estimates unchanged.

 

For the 2QFY2022, Leow and Yow are expecting Wilmar to bring in a core net profit of US$300 million ($420.4 million) to US$330 million. For the 1HFY2022, the analysts are expecting the group&rsquo s core net profit to come in at US$628 million to US$658 million.

 

While the second quarter is usually a quieter one with weaker overall sales volume, Leow and Yow see this quarter&rsquo s sales volume being affected by the weaker sales for tropical oils and sugar merchandising.

 

That said, the main earnings driver will come from the higher average selling prices (ASPs) for palm products and better margins from Wilmar&rsquo s Malaysia downstream and palm products that are not under the exports ban list.

 

In addition, the high palm oil and sugar prices would be the main supports to 2QFY2022 earnings, compensating the weaker sales volume, they write.

 

Wilmar&rsquo s earnings for the 1HFY2022 should be mainly supported by palm and sugar operations, while operations in China should be able to turn around in 2HFY2022.

 

Wilmar&rsquo s sugar milling division is also likely to see a &ldquo strong contribution&rdquo in the 2HFY2022 as thanks to the higher sugar production and sales volume in Australia coupled with high sugar prices.

 

In addition, the recent weakness in agri commodity prices will translate into higher margins in the 4QFY2022.

 

The analysts are also expecting to see higher sales volumes in the 2HFY2022 due to festive demand.

 

&ldquo The pressure on profit margin on the consumer pack business should ease with the recent sharp price correction in almost all of Wilmar&rsquo s feedstock, although its palm upstream operation could see lower contributions,&rdquo they write.

 

In China, the analysts are expecting Wilmar&rsquo s subsidiary, Yihai Kerry Arawana&rsquo s (YKA) earnings to be better q-o-q in the 2QFY2022, but down y-o-y due to margin pressures.

 

&ldquo [YKA&rsquo s] 1HFY2022 earnings should still be significantly lower y-o-y due to the sharp drop in 1QFY2022, which cannot be made up by its 2QFY2022 performance,&rdquo they say.

 

That said, the analysts are expecting to see better contributions for YKA in the 2QFY2022 from higher sales volume and slight improvements in its margins.

 

&ldquo Higher consumer pack sales as household usage increases during the major cities&rsquo lockdown compensated for the weaker sales for medium pack and bulk. In addition, selling price adjustments to consumer products will also help to ease the margin pressure marginally,&rdquo the analysts note.

 

In addition, contributions from oilseeds and grain should support YKA&rsquo s bottom line in the 2QFY2022.

 

The way they see it, YKA&rsquo s contributions from rice and flour should remain steady, while soybean crushing should see improvement on the back of higher crush volume and margins.

 

&ldquo China soybean crushing volume picked up significantly in 2QFY2022 vs 1QFY2022 with the arrival of soybeans from Brazil,&rdquo the analysts note.

 

&ldquo With higher utilisation rates and better animal feed sales, we should see better contributions from the oilseeds & grain division in 2Q22 to compensate for the weakness in 1QFY2022,&rdquo they add.

 

For the FY2022, FY2023 and FY2024, the analysts are also keeping their earnings forecasts with net profit estimates of US$1.77 billion, US$1.82 billion and US$2.0 billion respectively.

$6.40 to $6.00 to $5.50  ...

Might as well lower it to $4.00 and TP is at least met...


                                           

 

UOBKH highlighted that catalysts for the company include a stronger recovery in China operations, among others.

 

UOB Kay Hian&rsquo s Leow Huey Chuen and Jacquelyn Yow have maintained an unchanged &ldquo buy&rdquo rating and target price of $5.50 on the stock, pointing at the company&rsquo s ESG practices that &ldquo drive more positive impact.&rdquo

 

In a July 7 note, the analysts note that the company is one of the best in sustainable practices in the palm industry, being listed in the World Dow Jones Sustainability Index, among others.

 

As of December 2021, 98.2% (23.6 million tonnes) of Wilmar&rsquo s palm oil is traceable to the mills, and 83.5% of volume across Wilmar&rsquo s global supply chains is from suppliers that have at least company group-level commitment/action plans to address No Deforestation, No Peat and No Exploitation (NDPE) requirements.

 

68% of its global supply chain is also traceable to the estates, and Wilmar targets to hit 100% traceability to the mills by 2023.

 

Furthermore, Wilmar is the first in the palm sector to publish a human rights framework, emphasising human rights such as child protection, the women&rsquo s charter and more.

 

See also: RHB maintains &lsquo buy&rsquo call on Food Empire with the sale of its industrial office

 

The company also provides support for smallholders - small farmers whose farms account for their principal incomes - which make up 7.1% of Wilmar&rsquo s fresh fruit bunch (FFB) supply base.

 

They are given high-yield seedlings, high-quality fertilisers and training on sustainable agronomic practices. With these, the yield from the smallholders has also improved significantly.

 

Moving forward, Wilmar targets to achieve Sustainable Palm Oil (RSPO) certification for all their palm oil mills and supplying plantations by 2025.

 

Wilmar uses about 13% of its total RSPO production. The analysts say that while Wilmar is trying to increase the usage of RSPO, there is not enough RSPO production capacity for Wilmar&rsquo s refineries. Refinery capacity is at 23.6 million tonnes, but there are only 14 million tonnes of RSPO-certified production.

 

The company had also recently committed to net-zero emissions by 2050, with 57% of the energy used by Wilmar derived from renewable energy in 2021.

 

In addition, Wilmar has managed to fulfil the Indonesian government&rsquo s requirement to provide community plantations up to at least 20% of the total concession area of the company.

 

Currently, the company has a total planted area of over 34,032 hectares under government-originated plasma schemes and currently has fully met the regulation requirements.

 

The analysts also note an increasing demand for sustainability-certified palm products, with Wilmar saying that 91% of its RSPO production sold as RSPO and under schemes such as the International Sustainability & Carbon Certification (ISCC).

 

They maintain their net profit forecasts for Wilmar at US$1.78 billion ($2.49 billion), US$1.82 billion and US$2 billion for 2022, 2023 and 2024 respectively.

 

Some catalysts that they see for the company are a stronger recovery in China operations, and a surprise margin upside from the good timing in sourcing of raw materials.