Date: September 20, 2024
Broker: CGS International Securities USA, Inc.
Overview
Wilmar International is a leading agribusiness group with diverse operations including food products, feed and industrial products, as well as plantations and sugar milling. The company is based in Singapore and is a major player in global markets such as palm oil, sugar, and soybean crushing. As of 1H24, the company had total revenue of US$67.16 billion, with a market cap of approximately US$15.34 billion. Its stock is listed on the Singapore Exchange under the ticker WIL SP.
Impact of Interest Rate Cuts
With the recent 50 basis point cut in the US Federal Reserve Funds Rate (FFR) on September 18, 2024, Wilmar International (WIL) is expected to benefit from lower finance costs starting FY25F. The company has a high debt load, primarily due to short-term trade finance needs for its origination and merchandising business. As of 1H24, 72.9% of Wilmar’s total debt was short-term, which makes it highly sensitive to changes in interest rates. Wilmar’s total debt stood at US$26.8 billion by the end of 1H24, and the company’s effective interest rate closely correlates with the US FFR.
Debt Structure and Financial Outlook
Wilmar’s debt load is a major factor in its financial performance. As of 1H24, the company’s short-term debt primarily consisted of trade finance-related borrowings. Despite an increase in the effective interest rate from 4.1% in FY23 to 4.6% in 1H24, Wilmar managed to reduce its total debt from US$30.7 billion in FY23 to US$26.8 billion in 1H24. This reduction was largely due to softening commodity prices. The lower debt levels are expected to stabilize finance costs in the coming fiscal years, with Wilmar forecasting net finance costs to peak at US$751.4 million in FY24F.
Improving Margins in Key Markets
China Soybean Crush Margins
Wilmar International’s profit margins have improved across all its business segments as of 1H24. A particular bright spot is the soybean crush margins in China, which have improved recently due to higher pork prices and better demand for soybean meal as animal feed. Although crush margins remain in negative territory, Wilmar’s operational margins are expected to be better than industry averages due to its ability to manage the timing and costs of soybean purchases.
Australia Sugarcane Harvest
The start of the sugarcane harvesting season in Australia during 2H24F is anticipated to boost the profitability of Wilmar’s plantation and sugar milling segment. The resolution of a months-long industrial dispute in Wilmar’s Australian sugar mills will help streamline operations and boost output.
Indonesia’s Revised CPO Export Levy
Starting on September 21, 2024, Indonesia will implement a revised export levy of 7.5% on crude palm oil (CPO), down from the current levy of US$55/MT to US$240/MT. This new levy will be based on the government’s periodically set reference price. The levy reduction for refined palm oil products suggests that Wilmar’s refineries in Indonesia could benefit from better refining margins in the second half of 2024.
Dividend Yield and Stock Performance
Wilmar’s stock is expected to offer an attractive dividend yield of approximately 5.1% for FY25F. Despite the stock’s recent underperformance, declining by 14.1% over the past year, the ongoing rate cut cycle and improving operational margins are seen as potential catalysts for a stock price recovery. The company’s current price stands at S$3.18, with a target price of S$3.63, representing a 14.1% upside potential.
ESG Performance
Wilmar International has been recognized for its strong Environmental, Social, and Governance (ESG) performance. The company holds notable rankings and scores, including membership in the FTSE4Good Developed Index, FTSE4Good ASEAN 5 Index, and the Dow Jones Sustainability Indices. In 2022, Wilmar was ranked first by the Sustainability Policy Transparency Toolkit (SPOTT) with an improved ESG score of 93.2%. The company also holds a B+ rating from LSEG for its ESG combined score.
Major Shareholders and Financials
Wilmar’s major shareholders include PPB Group and Kuok Group with a 29.9% stake, Archer Daniels Midland (22.3%), and Kuok Khoon Hong (12.8%). The company’s total revenue for FY23A was US$67.16 billion, with projected revenues of US$70.03 billion for FY24F and US$72.65 billion for FY25F. Net profit for FY24F is expected to be US$1.27 billion, with a forecasted increase to US$1.53 billion in FY25F. The company’s recurring net profit for FY23 was US$1.77 billion.
Risks and Opportunities
Upside Opportunities
- Declining interest rates are expected to reduce Wilmar’s finance costs significantly in FY25F.
- Improving margins in China’s soybean crush business and better refining margins in Indonesia.
- Potential declaration of a special dividend from the sale of a stake in Adani-Wilmar.
Downside Risks
- Wilmar’s profitability could be affected by adverse weather conditions impacting palm oil and sugar harvests.
- Rising commodity prices could lead to increased debt and offset the benefits of lower interest rates.
