Equity Analysis /
Singapore

Wilmar: Vulnerable victim of Wuhan virus

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

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    Tellimer Research
    13 February 2020
    Published byTellimer Research

    We reiterate our Sell recommendation on Wilmar, cut our target price by 10% and lower our FY20-21 earnings forecasts by 8%, due to the Wuhan virus. Our new target price of SGD2.00 suggests nearly 50% downside. We think Wilmar has endemic vulnerabilities, and the coronavirus can negatively impact on the company in three ways:

    First, the Wuhan virus will seriously damage the demand for animal feed in China in FY20. This would erode Wilmar’s soybean processing margins. In Hubei province alone, 300mn chickens are about to be culled due to the coronavirus crisis. The supply of feed into Hubei has been halted. This suggests that demand for feed will collapse, along with demand for soybean processing. 

    Second, The Wuhan virus could weaken the yuan and expose Wilmar’s reliance on the carry trade. The Chinese authorities have already cut reverse repo rates. Wilmar has US$18bn in net debt (Q3 19), making it one of the most indebted companies in the region. In FY20f, Wilmar may have net interest expenses of US$500m on net debt of US$18bn, which is a net interest expense rate of 2%. Our analysis suggests that Wilmar's net interest expense has been depressed by the use of the carry trade. The narrowing of the US$-RMB carry trade to an interest rate spread of 2% in FY20 (from 4.4% in FY 18) could cut Wilmar’s FY20 net income by a fifth. A carry trade spread of 1% could shave off as much as a third of its earnings.

    Third, the fallout from the virus will cast a dark shadow on Wilmar’s listing of its Chinese business. Wilmar has risen 24% in the past year due to the expectation of the IPO of its China business in Shenzhen. Wilmar is the largest player in the branded vegetable oil space in China. The listing could now be postponed.

    Irrespective of the virus, Wilmar's business model has endemic vulnerabilities. Its ROIC has trailed its WACC for most of the past five years. Its US$6bn of capex in the past five years has not improved its EVA. These weaknesses will only be exacerbated by the virus outbreak. 

    We reiterate Sell due to the virus: Our DCF-derived valuation of SGD2.00 suggests a share price downside of nearly 50%. At 17x 2020f EV/EBITDA, Wilmar is trading at a 42% premium to the sector average. In our view, this is unjustifiable in light of the Wuhan crisis and exposure to the carry trade.