AGRIBUSINESS giant Wilmar International : F34 -0.55% on Friday (Oct 28) posted a net profit of US$766.2 million, up 34.7 per cent from a year ago, for the third quarter ended Sep 30.

 

Revenue increased 10.2 per cent to US$18.9 billion on the back of better sales across the group&rsquo s feed and industrial products, and food products businesses.

 

The feed and industrial products segment saw an 8.5 per cent rise in sales volume, mainly driven by a 12.7 per cent increase in sales for oilseeds and grains, and 12.1 per cent increase in sales for sugar.

 

The food products segment posted 3.2 per cent growth in sales volume, dragged down by a 2.8 per cent dip in consumer products sales. Wilmar nevertheless called the results &ldquo satisfactory&rdquo , and noted that prices of consumer products were adjusted upwards while raw material costs started to decline.

 

The group also had a higher share of results from joint ventures and associates, and lower effective tax rate during the quarter.

 

Net profit for the nine months ended September was US$1.9 billion, up 46.3 per cent from a year ago.

 

Operating cash flow jumped 68.2 per cent in Q3 to US$3.5 billion, taking into account the recent decline in commodity prices and hence lower net working capital requirements.

 

Wilmar said that while global operating conditions remained challenging, the group is confident of its &ldquo integrated and diversified business model and sound risk management policies&rdquo .

 

ANALYSTS at CGS-CIMB have maintained their &ldquo add&rdquo rating on Wilmar International : F34 +0.56% despite a cut in target price &ndash from S$5.69 to S$4.68 &ndash as the valuations of its listed subsidiaries weaken. 

 

In an Oct 19 report, CGS-CIMB noted that the food processing and investment holding company saw a 15 per cent decline in share prices to S$3.52 year to date. 

 

The revised target price therefore reflects the latest valuation of Wilmar&rsquo s listed subsidiaries, it said, which includes its Chinese edible oil and grain subsidiary Yihai Kerry at 40 yuan per share, Indian food subsidiary Adani Wilmar at 655 rupees per share, and Indian sugar refining subsidiary Shree Renuka at 62 rupees per share. The target price is also closer to the company&rsquo s book value of S$4.39 as at Jun 30, 2022, implying a price-to-book value (P/BV) of around 1.1 times. 

 

This came even with strong earnings in the first half of FY2022, said CGS-CIMB &ndash likely due to rising interest rates, which could negatively impact its earnings, and a strong US dollar, which might affect earnings that are derived from China and South-east Asia. 

 

The research house added that although it believes that Wilmar&rsquo s long-term business prospects will remain strong, with investments in new facilities expanding the group&rsquo s earnings base, market sentiment might be weak because of concerns about inflationary pressures and geopolitical tensions.

 

If anything, CGS-CIMB expects Wilmar to hit record earnings in FY2022, with a core net profit of US$600 million to US$650 million for Q3. This is in line with the previous quarter&rsquo s net profit of US$652 million and an increase from Q3 FY2021&rsquo s net profit of US$576 million.

 

&ldquo The third quarter has traditionally been its best earnings quarter, driven by festive demand and seasonally higher palm oil output,&rdquo it explained. 

 

CGS-CIMB also raised Wilmar&rsquo s earnings per share forecast by 14 per cent, citing the company&rsquo s potentially &ldquo better than expected&rdquo profit margin, particularly for its tropical oil segment and food product segments.

 

For instance, Wilmar saw higher export volumes in its tropical oil segment as Indonesia lifted its restrictions on palm oil export, resulting in better economies of scale and downstream margins for the company. The company&rsquo s food products segment is likely to show a sequential improvement in earnings from declining raw material costs too, it said. 

 

The analysts highlighted that Wilmar currently offers &ldquo deep value&rdquo , trading at 7.8 times its price-to-earnings ratio and 0.8 times its P/BV, with a dividend yield of 5.8 per cent. This is 1.5 standard deviation points below its 12-month historical mean. 

 

&ldquo We estimate that in the worst case scenario where Wilmar&rsquo s share price falls to its previous P/BV low in 2020, the downside to its share price is 6 per cent to S$3.29,&rdquo it said. 

 

Additionally, CGS-CIMB believes that the company&rsquo s share price could rerate closer to one to 1.3 times its P/BV, should fears of inflation and geopolitical tensions abate through the delivery of stronger earnings. The potential upside to its share price would then range from 25 to 62 per cent at S$4.40 to S$5.70, respectively. 

 

&ldquo We believe the market has more than priced in (their) concerns,&rdquo it said.

 

&ldquo We are positive on the group&rsquo s medium-term earnings prospects due to its capacity expansion plans, ventures into central kitchens in China and strong environmental, social and governance practices.&rdquo

 

In their report, the analysts are keeping their CPO average selling price (ASP) assumption at RM5,100 per tonne for 2022.

 

RHB Group Research analyst Hoe Lee Leng, as well as the research teams from Singapore and Indonesia, are keeping their &ldquo neutral&rdquo recommendation on the plantation sector as crude palm oil (CPO) prices remain under pressure.

 

The price pressures are due to the rising stock levels in Malaysia due to the policy reversal in Indonesia.

 

&ldquo These levels should decrease once Indonesia&rsquo s stock levels normalise, and once the disappointing peak output caused by Malaysia&rsquo s labour shortage kicks in,&rdquo says the team led by Hoe. &ldquo The 2QFY2022 reporting season saw most planters booking results that were in line, after four consecutive quarters of beating forecasts,&rdquo the team adds.

 

In Malaysia, the labour shortage, which has continued to hamper harvesting activities, is expected to continue into the 3Q2022, since only a trickle of workers have come in so far. More workers are expected to enter the country in September and October, the team notes.

 

In Indonesia, plantations with younger estates have seen y-o-y increases in the 2QFY2022, while older estates have registered y-o-y declines.

 

That said, output in Indonesian plantations have recovered sequentially across the board, averaging a growth of around 26% q-o-q for the companies under RHB&rsquo s coverage.

 

&ldquo As usual, the Association of Indonesian Palm Oil Producers&rsquo (GAPKI) official 2Q22 CPO output trends differed &ndash with a 15.5% y-o-y drop and a 7.6% q-o-q decline, bringing 1H2022 fresh fruit bunches (FFB) growth to -4.1% y-o-y,&rdquo the team writes.

 

Despite the upcoming peak season, planters in Malaysia are said to be more conservative in its guidance for the 2H2022 given the ongoing labour shortage.

 

As it is, most players are expecting flattish-to-slight FFB output growth.

 

Meanwhile, in Indonesia, planters in the country are expecting to see higher output growth in the 2H2022 on the back of black bunch counts done and the rate of q-o-q growth in the 2Q2022. In the FY2022, Indonesian planters are expecting FFB output to grow by single digits despite the year-to-date (ytd) decline in the 1H2022.

 

To this end, the analysts are anticipating a &ldquo less aggressive&rdquo forward-selling stance for the 2H2022 on the back of the recent decline in prices. These planters, write the analysts, are nervous about price volatility and the direction of prices. Ytd, prices are now at RM5,800 ($1,798.33) per tonne, they point out.

 

Margins are also expected to improve for planters in Indonesia with downstream operations. This is as the Indonesian government has extended the tax levy holiday to end-October from end-August. With this, their counterparts in Malaysia should see lower downstream margins in the 2H2022 given the resumption of the competitive advantage Indonesia has with this change.

 

In August, Malaysia&rsquo s palm oil output rose 9.7% m-o-m, while exports fell 1.9%, resulting in inventory rising to 2.09 million tonnes (+18.2% m-o-m).

 

&ldquo Stock levels in Malaysia could remain high until Indonesia&rsquo s tax-free holiday ends (at end-October), which means exports from Malaysia could only improve towards the year-end,&rdquo the analysts write. &ldquo This, together with potential disappointments in output in Malaysia due to the prevailing labour shortages, could mean stock levels may only drop towards the year-end.&rdquo

 

In addition to their &ldquo neutral&rdquo call, the analysts are keeping their CPO average selling price (ASP) assumption at RM5,100 per tonne for 2022.

 

Among the plantation names under their coverage, SGX-listed Wilmar remains one of the analysts&rsquo top picks. They have kept &ldquo buy&rdquo on Wilmar with a target price of $4.95.