Maybank KimEng started Wilmar International at Buy with a S$4.21 target price, saying the stock offers a shelter against the uncertainty of the U.S.-China trade war.
“Fighting won’t stop you from eating,” the brokerage said in a note Friday.
It noted more than 90 percent of Wilmar’s revenue is from emerging markets, while its consumer-staples brands have leading market shares in China, India, Southeast Asia and Africa. That includes cooking oil, flour, rice, sugar and animal feed inputs, the note said.
“This provides a defensible moat to take advantage of rising affluence as well as increasing demand for food quality and safety,” Maybank KimEng said.
“In the current climate, with U.S.-China trade war led uncertainty and poor visibility on global trade and technology flows, we believe WIL provides a unique hiding place for investors,” the brokerage said. “Geared towards domestic, essential food consumption in China and other trade-war affected countries in Asia, with no exposure to trade-war related technologies, WIL is well positioned to deliver growth.”
The brokerage added that the U.S.-China trade war could benefit Wilmar. Imports of soybeans into China are expected to drop around 10 percent on-year this year, with palm oil likely to take up a lot of the unfulfilled demand, Maybank KimEng said.
Wilmar has upstream plantations and “extensive” import infrastructure for palm oil in China, which could see wider margins and improved pricing from a shift toward higher palm oil imports, the note said.
‘Attractive entry point’
After 2013-2018 volumes grew at a 4 percent compound annual growth rate (CAGR), the brokerage forecast 2018-2021 CAGR of just 2.6 percent, but added that leaves “significant room for upside surprise.”
It projected core earnings would grow at 7 percent CAGR over 2018-21.
Wilmar’s stock is trading below its long-term mean price-to-book value despite offering an “attractive entry point” for exposure to emerging market consumption over the long term, Maybank KimEng said.
“WIL’s book value comprises mostly scarce resources, including port based processing facilities, upstream plantations, operating licenses. These cannot be easily replicated,” the note said.
Historically, the stock has been a counter for recession fears, returning 17 percent to 175 percent during downturns since 2000, including the dotcom bust and the Global Financial Crisis, the note said. The potential listing of its Chinese assets in China, where peer valuations are 1.9 times higher, could also be a catalyst for the stock, Maybank KimEng said.
But the brokerage noted environmental, social and governance (ESG) issues remain a “critical known-unknown,” given Wilmar’s sizable footprint across the value chain.
“WIL has faced accusations of lack of sustainability, human rights abuses, illegal land grabbing, destruction of habitats and contributing to climate change etc.,” the note said.
“Nevertheless, the group has been proactively building partnerships and reporting frameworks with its stakeholders – particularly environmental and non-governmental organisations to address ESG issues,” it added.
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