Wilmar International (WIL SP), Asia's largest agribusiness player, plans to raise US$2bn by listing its China unit. The preliminary prospectus was filed this week with the Shenzhen Stock Exchange. This may be the largest Chinese IPO in 2019.
Wilmar has US$18bn of net debt, marking it the most indebted company on the SGX. In our thematic piece Is there a Debt Bomb Ticking? we stress tested the cashflows of 42 consumer companies on their vulnerability to an interest rate hike and depreciation. Wilmar appears prominently in the danger zone.
The potential unwinding of the US$-RMB carry trade could expose Wilmar’s earnings. In FY 18, Wilmar had net interest expenses of US$384mn on net debt of US$18bn, which is a net interest expense rate of 2%. Our analysis suggests that Wilmar's net interest expense is so low due to its use of the carry trade. It is conceivable that a narrowing of the US$-RMB carry trade to an interest rate spread of 2% (from 4.4% in FY 18) could reduce Wilmar’s FY 19 net income by 20%. A narrowing to 1% could shave off over a third of its earnings.
Poor returns from US$4.9bn capex spending. The mainstay of Wilmar’s FY 14-18 capex of US$4.9bn was the tropical oils segment, which includes palm oil and soybean processing. Wilmar’s capex per tonne for processing assets has been higher than the industry average of US$160/t. The ROIC has been below its WACC in the last five years, and may falter in FY 19-FY 21 due to excess processing supply.
Processing margins are weak due to a capacity glut. Intense expansion in palm oil and soybean oil refining capacity have weakened refining margins in the industry. Wilmar is looking to use the IPO proceed for refining capacity in China. Companies like Mewah, Indofood Agri and China Agri have all reported poor margins in the face of the glut. Wilmar’s own pre-tax processing margins in the palm & laurics business has weakened in FY 13-18. Meanwhile, demand for animal feed has plummeted in China due to the African Swine Flu virus.
Reiterate Sell: Our DCF-derived valuation suggests a downside of 41%. At c15x EV/EBITDA 2019f, Wilmar is trading at a 39% premium to the sector average. This is unwarranted in light of its faltering returns and exposure to the carry trade.