DBS keeps Wilmar at 'buy', shrugs off potential balance sheet and earnings impact from Adani joint venture
"Wilmar will be able to maintain its earnings performance amid commodity price volatility"
William Simadiputra of DBS Group Research has kept his “buy” call on Wilmar International, as he believes that the recent short selling attack suffered by Adani group, which has an India-listed joint venture with Wilmar, should see no impact to the Singapore-listed palm oil giant.
In his Feb 3 note, Simadiputra notes that prior gains booked by Wilmar in 1Q22 arose from revaluation and dilution of its interest post Adani Wilmar's listing, not marked to post-listing AWL’s share price appreciation.
Back in 1QFY2022, following the IPO of Adani Wilmar, Wilmar booked a gain of US$180 million from the revaluation of the stake, which was also diluted from 50% to 44%.
“The gain was not a result of a mark-to-market gain arising from AWL positive share price performance post listing,” notes Simadiputra.
He estimates that the value of Adani Wilmar’s stake is carried on Wilmar’s books at US$440 million as of Dec 2022, and that the share of earnings booked was US$25 million for 1HFY2022 ended June 2022.
“The size of Adani Wilmar’s exposure on Wilmar’s balance sheet and income statement is relatively small to its own earnings estimated at US$2.3 billion for FY2022.
“Wilmar accounts for its investment in Adani Wilmar through equity accounting method, and hence share price fluctuation in the latter will not be reflected on Wilmar’s income statement,” says Simadiputra.
Citing Hindenburg Research, the short seller, the analyst notes that Adani Wilmar has a relatively strong balance sheet relative to other Adani’s listed companies, with net debt-to-EBITDA of 1.9x, which is lower than the industry average of 2.9x, as well as a healthy current ratio of 1.2x.
The recent correction suffered by Adani Wilmar was most likely driven the previous rich valuation of more than 60 times earnings, and not merely from the Hindenburg report, sys the DBS analyst.
Meanwhile, Adani Wilmar is seen to have a strong a consumer products business and portfolio to sustain its operation going forward, further making possibility of write-down in values low.
The analyst’s $6.67 target price, derived using a sum-of-the-parts valuation methodology, implies a FY2023 PE of 16.5 times.
In contrast, Wilmar trades at just 10 times earnings. “Wilmar is mispriced as just another palm oil company,” he adds.
As the company enlarges its footprint in the consumer branded products segment, Simadiputra believes that Wilmar should trade at a higher PE multiple.
“We believe Wilmar will be able to maintain its earnings performance amid commodity price volatility as Wilmar’s products have resilient demand.”
“Wilmar’s investments in midstream and downstream segments will create a strong platform that would enable the company to adapt to external challenges and deliver consistent margins and returns to investors,” he says.
As at 4.26 pm on Feb 6, Wilmar traded at $4.03, down 0.49% for the day and down 8.41% over the past year.
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