Wilmar recently caught my attention. It has fallen approximately 11% from an intraday high of $4.95 on 7 Aug 2020 to close $4.41 on 1 Sep 2020.
Six points attracted me to Wilmar. Let’s take a look.
1. Imminent catalyst i.e YKA IPO – left one approval to go
Wilmar cited that its Chinese subsidiary, Yihai Kerry Arawana Holdings Co., Ltd (“YKA”), has obtained listing clearance from the Shenzhen Stock Exchange (“SZSE”) ChiNext Board Listing Committee (the “Committee”) and has submitted the updated prospectus to the China Securities Regulatory Commission (“CSRC”) for final registration approval for listing on SZSE ChiNext Board on 10 Aug 2020.
In other words, based on CGS-CIMB Securities’ report dated 12 Aug 2020, the report cited that Wilmar is hoping to list YKA this month as it is only one approval away from listing.
2. Market may have underestimated impact of YKA IPO on Wilmar
In the same report by CGS-CIMB Securities, they calculate various scenarios on YKA’s valuations and its effects on Wilmar’s share price. Based on OCBC Securities’ Research report dated 12 Aug 2020, it cited that Wilmar’s management mentioned that the average P/E multiple for YKA’s peers’ listing on Shenzhen Stock Exchange is ~38x P/E.
Based on Figure 1 below, based on the assumption that YKA can fetch 30x FY19 PE, CGS CIMB calculates that Wilmar’s share price may be around $6.32! (Please read this in conjunction with the risk factors below)
3. Potential special dividend upon IPO
Most analysts postulate that Wilmar may dish out part of its IPO proceeds as special dividends to reward shareholders. Based on a UBS Research report dated 26 Aug 20, UBS estimates that Wilmar may give a special dividend of approximately US$0.126 / share (SGD0.171 / share). If this materialise, it may be yet another catalyst.
4. 2HFY20 should continue to be satisfactory on the back of a good 1HFY20
Wilmar delivered a good set of 1HFY20 results which saw its revenue and net profit jump 12% and 49% to US$22.7b and US$636m respectively. Based on Wilmar’s 1HFY20 results presentation, management cited that they are cautiously optimistic that 2H2020 should continue to be satisfactory as
a) Food Products and Feed and Industrial Products segments are expected to continue to perform well for 2HFY20F;
b) The recent increase in palm prices are likely to have a favourable impact to their Plantations business.
5. Chart continues to look bullish over the medium to long term
Based on Chart 1 below, notwithstanding the short term headwinds, Wilmar’s long term trend continues to be up, as evidenced by its long term rising 200D exponential moving average. It is encouraging that the recent re-tests of the lows on 25 Aug and 1 Sep were accompanied with lower than average volume and did not breach below its intraday low of $4.31 seen on 20 Aug. Since 20 Aug, indicators such as RSI, OBV are slowly rising which may indicate reduced probability of it breaching its intraday low of $4.31.
Near term supports: $4.38 – 4.39 / 4.35 / 4.33 / 4.30 – 4.31 / 4.28
Near term resistances: $4.42 – 4.43 / 4.50 – 4.51 / 4.60 / 4.75
Chart 1: Medium term still up despite short term headwinds
Source: InvestingNote 1 Sep 20
6. Average analyst target $5.04
With reference to Figure 2 below, analysts are generally positive on Wilmar with an average target price $5.04. Suffice to say that most analysts are giving a target price north of $5.00.
Figure 2: Average analyst target $5.04; potential capital upside of around 14%
Source: Bloomberg 1 Sep 20
As with almost all investments, they do carry risks. I have listed some noteworthy risks but do note that it is not an exhaustive list of risks.
1. Delay in YKA’s IPO
Although Wilmar has submitted the updated prospectus to the CSRC for final registration approval for listing on SZSE ChiNext Board on 10 Aug 2020, there is no certainty that Wilmar can get the approval in 3QFY20F. Furthermore, there is also no certainty that CSRC will approve the YKA’s IPO (though rejection at this stage is quite rare in my personal opinion).
2. YKA may fetch a lower than expected valuation
Although management cited that the average P/E multiple for its peers’ listing on Shenzhen Stock Exchange is ~38x P/E (based on OCBC Securities’ Research report), DBS Research report dated 12 Aug 2020 cautioned that YKA has no direct competitor on Shenzhen Stock Exchange and thus YKA may fetch a different valuation.
3. Usual business risks
The usual business risks such as lower than expected processing margins; changes in export tax policies; geographical exposure (i.e. 60% of its FY19 revenue came from China); weather and supply chain congestion etc may affect Wilmar’s results and operating performance.
4. Share overhang from ADM’s placement of 170.5m Wilmar shares @$4.40
In the near term, there may be some share overhang from ADM’s sale of 170.5m Wilmar shares @$4.40 / share. However, I think some of the investors who purchased Wilmar shares via this placement are likely to hold at least till YKA’s IPO approval, or pricing of the IPO.
Readers should be cognisant of the pros and cons in owning Wilmar shares. Personally, what attracts me is its upcoming YKA ipo. As my basis is mainly on the IPO, the event that I am watching closely is its upcoming YKA IPO.
P.S: I have informed my clients on Wilmar past two trading days. I am vested. Readers please visit Wilmar’s website HERE and do your own due diligence. Investments carry risk and its best to be familiar and comfortable in what you invest in.
Please refer to the disclaimer HERE