Brokers' take: Wilmar share price drop 'unjustified'; gap with YKA to narrow, say analysts

THE divergent price action between Wilmar International and its newly listed Chinese subsidiary Yihai Kerry Arawana (YKA) was "unjustified", and the two stocks' valuation gap will likely narrow, analysts said in separate reports recently.

Last Thursday, YKA made a gleaming debut on the Shenzhen bourse by spiking to finish at 56 yuan, more than double its initial public offering (IPO) price of 25.7 yuan.

However, this was not reflected in Wilmar's stock price as the counter sank amid heavy volumes traded, ending the day 6.4 per cent lower at S$4.36.

"We think the negative share price reaction could be temporary and the listing of YKA is a long-term positive as it allows investors to better appreciate the true value of Wilmar's businesses in China," CGS-CIMB analysts wrote.

The brokerage pointed out that based on Wilmar's market cap, after stripping out its stake in YKA at the IPO price, investors are paying negative US$20.6 billion for the rest of the assets, which actually generated a net profit of US$593 million last year.

This suggests an underappreciation of the agri-food giant's businesses, said CGS-CIMB analysts Ivy Ng and Nagulan Ravi.

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Likewise, Maybank Kim Eng (MKE) found the slump in the parent company's share price "unjustified", and the price gap with YKA "too wide".

This is because from a market cap differential perspective, it implies that Wilmar's non-Chinese businesses, which make up 44 per cent of group revenue, have no value.

MKE analyst Thilan Wickramasinghe noted that Wilmar's current market cap of S$28 billion is half of the value of its holding in YKA. This discount implies that its operations in markets such as Indonesia, India, Europe and Africa have no value.

In addition, the drop in the Singapore-listed stock's price also ignores the potential for special dividends, according to Mr Wickramasinghe.

He estimates that Wilmar may spend some US$1.6 billion in capital expenditure in 2021. Assuming 60 per cent of this, or US$1 billion, is spent in China using the IPO proceeds, that frees up cash at Wilmar for special dividends.

A US$1 billion special dividend translates to S$0.22 dividend per share, implying a 5 per cent special yield, the analyst added.

The stock was trading at about 18 times price-to-earnings (P/E) ratio for 2020, compared to an estimated 75 times P/E for YKA, Mr Wickramasinghe said last Thursday.

Meanwhile, CGS-CIMB also pointed to the valuation gap, which it thinks will narrow and favour Wilmar.

"We continue to think Wilmar represents a cheaper and more liquid entry into YKA," the brokerage noted.

Wilmar was trading at a forward P/E of 16 times against YKA's 68 times on Friday, according to estimates by the CGS-CIMB analysts.

They said the contrasting showing in the two counters last Thursday came as a surprise. They suggested that a possible reason was a share overhang from the earlier placement of 2.68 per cent of Wilmar's shares by major shareholder Archer Daniels Midland (ADM) at S$4.40 apiece.

"Investors who took the placement may have sold Wilmar's shares to lock in quick trading gains when its share price recently surged to as high as S$4.74 on the news of the China IPO," the analysts said.

They added that some investors may have also believed that the YKA IPO was the sole catalyst driving Wilmar's rerating, following which the interest in the Singapore-listed firm's stock may subside.

CGS-CIMB reiterated its "add" call on Wilmar and target price of S$5.53.

MKE recommended "buy" on the stock's dips, and maintained its target price of S$5.24 for now, pending the Q3 2020 trading update on Oct 30.

MKE noted that operational recovery was underway for the agri-food giant, and its earnings per share for 2021 is likely to grow by 33 per cent year on year due to improving crush margins in China and recovering demand from India and Indonesia.

Wilmar shares fell S$0.05 or 1.1 per cent to trade at S$4.44 as at 2.54pm on Monday. YKA were trading at 45.16 yuan as at 2.58pm, down 3.85 yuan or 7.9 per cent.

YKA is a wholesaler and distributor of food products such as small package edible oil, rice and flour. Its namesake cooking oil with a Golden Dragon Fish logo has been a staple of Chinese kitchens for decades.