Date: September 20, 2024
Broker: CGS International Securities
Overview
Wilmar International (WIL) is a leading agribusiness company based in Singapore. As of September 2024, the company is focusing on its financial strategy to capitalize on external market conditions such as U.S. interest rate cuts and improving margins in key markets, including China and Australia. The company’s current stock price is S$3.18, with a target price of S$3.63, indicating an upside potential of 14.1%.
Financial Outlook and Interest Rate Impact
Wilmar International’s financial performance is closely tied to interest rates due to its high level of short-term debt. As of 1H24, the company had a total debt of US$26.8 billion, with 72.9% of it being short-term. The recent 50-basis point cut in the U.S. Federal Funds Rate (FFR) is expected to significantly reduce Wilmar’s finance costs in FY25F, as the majority of its debt is sensitive to rate fluctuations. The company’s net finance costs are forecasted to peak in FY24F at US$751.4 million, with gradual improvements thereafter.
China Soybean Crush Margins and Market Position
Wilmar’s business segments have shown year-on-year improvements, particularly in China. As of 1H24, Wilmar’s PBT (Profit Before Tax) margins across its three major business segments—food products, feed and industrial products, and plantation and sugar milling—expanded. Notably, soybean crush margins in China have improved, driven by higher pork prices and demand for soybean meal used in animal feed. While soybean crush margins remain negative, Wilmar’s operational margins are expected to fare better due to favorable timing in soybean purchases from the U.S. and Argentina.
Australian Operations and Sugarcane Harvesting
In 2H24F, Wilmar is expected to benefit from the start of the sugarcane harvesting season in Australia. This follows the resolution of a labor dispute in its Australian sugar mills, which had caused operational disruptions. The company’s sugar milling segment should see profitability improvements as a result of this seasonal tailwind.
Indonesian Palm Oil Business
Wilmar’s palm oil refining margins are set to improve due to changes in Indonesia’s export levy for crude palm oil (CPO). Effective from September 21, 2024, the Indonesian government revised the CPO export levy to 7.5% of the reference price, down from a flat fee per metric ton. The reduction in levy charges for more refined palm oil products should enhance profitability in Wilmar’s refining operations.
Dividend Yield and Valuation
Wilmar offers an attractive dividend yield of approximately 5.1%. This yield, coupled with the expected reduction in finance costs and improvements in operational margins, adds to the company’s appeal for long-term investors. The company’s stock is currently trading at a forward P/E ratio of 12.1x for FY24F, which is below its 5-year mean, with projected earnings growth of 20.6% in FY25F.
Key Risks
The primary downside risks for Wilmar include adverse weather conditions that could impact harvests in its palm oil and sugar operations. Additionally, significant increases in commodity prices could result in higher debt loads, offsetting the benefits of lower interest rates. Escalating commodity prices would negatively affect the company’s finance costs, undermining profitability improvements.
ESG Commitment
Wilmar is a member of various sustainability indices, including the FTSE4Good ASEAN 5 Index and the Dow Jones Sustainability Index. The company has received strong ESG (Environmental, Social, and Governance) scores from multiple agencies, with an overall LSEG ESG combined score of B-. It is also recognized for its proactive measures in mitigating risks associated with forced labor allegations, especially in its palm oil operations in Malaysia.
Major Shareholders
As of the latest report, Wilmar’s major shareholders include PPB Group & Kuok Group (29.9%), Archer Daniels Midland (22.3%), and Kuok Khoon Hong (12.8%). These entities provide significant stability and support for the company’s long-term growth strategies.
Price Performance
Wilmar’s stock has had a mixed performance over the past year. Over the last 12 months, it has declined by 14.1%, but it has shown short-term improvements, with a 2.3% increase over the past month. However, its relative performance compared to the Singapore Index remains under pressure, with a 33.5% underperformance over the last year.
Conclusion
Wilmar International is well-positioned to benefit from favorable macroeconomic conditions, including U.S. interest rate cuts and improving margins in key business segments. With a target price of S$3.63 and a potential upside of 14.1%, the company presents an attractive investment opportunity, particularly for those seeking a stable dividend yield. However, investors should be mindful of potential risks related to commodity price fluctuations and weather conditions impacting its operations.
