Wilmar: Eyes HK Listing for China Ops

Eyes HK Listing for China Ops. Wilmar International (Wilmar) has been reported by Reuters as having hired three banks to handle what could be a US$3b flotation of its China business in HK - unnamed sources cited by the newswire said that the IPO is set for a listing late this year or early next year. While the group has declined to comment on the report, it had previously unveiled such plans to list 20-30% of its China operations in either HK or China to tap investor interest in its biggest market and to raise cash for acquisitions. In FY08, its China business turned in revenue of US$14.3b (49% of overall sales) and an estimated US$500m to its bottom line. Assets in China amounted to US$6.5b, or nearly 40% of its total assets.

Limited impact from lower CPO prices. Meanwhile, CPO (crude palm oil) futures in KL have recently hit a 13-week low, with the actively traded Sep contract falling 6.1% last week, unsettled by concerns of more bearish news on the horizon. The most worrying is the further deterioration of the fundamentals for the crop - industry watchers warned that the CPO stockpile could surge going into the high production period as foreign demand has been poor. However, we do not expect lower CPO prices to have much of a negative impact on the group although revenue may fall (mainly due to its palm and lauric business). On the other hand, a significant downstream player such as Wilmar may benefit from lower feedstock prices as it still sources around 60% of its requirements from third party plantation companies. In any case, we note that Wilmar has shown a consistent ability to manage the price fluctuations, often riding out the volatility with aplomb.

Maintain BUY with S$5.64 fair value. The latest news (though unconfirmed by the group) shows that the proposed HK listing of its China operations is on track. Based on its estimated US$500m bottom-line contribution, we believe that the US$3b flotation is not an issue, assuming a valuation of 20x and a divestment of 30%. However, we will hold off adjusting our numbers until we get more information about the structure and form of the proposed listing. Nevertheless, we are bumping up our valuations slightly from 18x blended FY09/10 PER to 18.5x, deriving a fair value of S$5.78. Maintain our BUY rating.

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