Listing may help " unlock value" and boost Wilmar' s share price: analysts

 

SHARES in Wilmar International rallied 1.16 per cent on Thursday, even as the local benchmark declined, after the mainboard-listed agribusiness said its Chinese unit has received the final approval from the China Securities Regulatory Commission for an initial public offering (IPO).

 

The listing of Yihai Kerry Arawana (YKA) on the Shenzhen Stock Exchange' s ChiNext Board is expected to take place by mid-October, Wilmar announced on Wednesday.

 

Wilmar shares finished at S$4.35 on Thursday, up S$0.05. Some 25.2 million shares changed hands, making it one of the most heavily traded counters on the Singapore bourse for the day.

 

The stock had climbed as high as S$4.56 in intraday trading, advancing S$0.26 or more than 6 per cent from Wednesday' s close.

 

CGS-CIMB analysts Ivy Ng and Nagulan Ravi said in a report on Wednesday that the listing could catalyse Wilmar' s share price and help " unlock value" for the group' s assets in China, which makes up about 60 per cent of its earnings.

 

The brokerage has maintained its " add" recommendation on the counter with an unchanged target price of S$5.53.

 

" The next event that investors will be watching out for is the pricing of the IPO. The IPO pricing will be based on investor demand and YKA' s 2019 recurring earnings of 4.5 billion yuan (S$904.7 million)," the analysts said.

 

Based on CGS-CIMB' s estimates, the market could be " underestimating YKA' s potential" as the implied price-to-earnings ratio for YKA at Wilmar' s current price is 19.4 times, versus 38 times for its comparable peers, the brokerage said.

 

CGS-CIMB noted that Wilmar' s share price had corrected from its year-to-date peak of S$4.86 on Aug 19 due to concerns of a short-term overhang on the counter from the sale of shares by its second-largest shareholder, Archer Daniels Midland (ADM).

 

Following the news that ADM had decided to trim its stake in the agri-commodities company, Wilmar shares tumbled more than 10 per cent on Aug 20.

 

" Despite the near-term setbacks, we remain positive on Wilmar due to its favourable earnings prospects and our view that the market could be underestimating YKA' s potential value," CGS-CIMB said. It added that there is also the potential of a special dividend following YKA' s listing.

 

Earlier on Wednesday, Wilmar said the listing would entail the issuance of new YKA shares accounting for not less than 10 per cent of YKA' s issued share capital on an enlarged basis.

 

The group also noted that strategic investors - which constitute mainly state-owned funds, sovereign wealth funds and insurance companies - have been identified to subscribe for about 30 per cent of YKA' s IPO shares.

 

The final subscription size by the strategic investors, as well as the composition of the strategic investors, are still subject to final confirmation by the regulatory authorities, Wilmar added.

 

Wilmar also said there is " no certainty that the proposed listing will proceed" , as it is still subject to prevailing market conditions.

WILMAR: Look out for YKA' s IPO pricing

Wilmar International' s 99.99%-owned subsidiary Yihai Kerry Arawana Holdings (YKA) has received final registration approval for a listing on the Shenzhen Stock Exchange SZSE ChiNext Board from the China Securities Regulatory Commission.

Excerpts from CGS-CIMB report

Analysts:  Ivy NG Lee Fang, CFA &   Nagulan RAV

Why YKA listing could catalyse Wilmar&rsquo s share price ● We are positive on this as the approval will allow Wilmar to proceed with the listing of YKA. We believe this could further catalyse its share price as the listing will help unlock value for the group&rsquo s operations in China, which make up around 60% of the group&rsquo s earnings. The next event that investors will be watching out for is the pricing of the IPO.   " Should YKA&rsquo s IPO fetch a 38x P/E valuation, we estimate the market cap for YKA to be around US$24.3bn, higher than Wilmar&rsquo s current market cap of US$20.1bn." -- CGS-CIMB report The IPO pricing will be based on investor demand and YKA&rsquo s 2019 recurring earnings of Rmb4.5bn. Wilmar revealed in its earlier briefing that the average P/E valuations of comparables listed in the same stock exchange category is 38x. Should YKA&rsquo s IPO fetch a 38x P/E valuation, we estimate the market cap for YKA to be around US$24.3bn, higher than Wilmar&rsquo s current market cap of US$20.1bn. Implied P/E for YKA at current Wilmar share price is only 19.4x.

● Based on our estimates, if YKA is valued at P/Es of between 23x and 38x, its potential market capitalisation should be between US$14.7bn and US$24.3bn.

We value Wilmar' s remaining business (ex-YKA) at 12x-16x to arrive at a valuation of between US$7.4bn and US$9.9bn.
 

Wilmar
Share price:  S$4.31	Target:  S$5.53

Combining these two parts, we estimate Wilmar' s market cap to be in the range of US$22.1bn to US$34.2bn (or S$4.81 to S$7.43 per share), which is higher than its current share price of S$4.30 per share.

Assuming Wilmar (ex-YKA) is valued at 12x P/E, we estimate the implied P/E for YKA at Wilmar&rsquo s current share price to be just 19.4x.