• Keep BUY, new SGD4.65 TP from SGD4.40, 21% upside, 4% yield. We continue to favour Wilmar International for its integrated and diversified business model. Valuations are cheap at 11x FY23F P/E – below its China-listed peers’ 20-40x – while its combined stake in Yihai-Kerry and Adani Wilmar is almost double that of its own market capitalisation.

• We see more upside risk for the sector now, with the looming El Nino and potentially escalating geopolitical risks relating to the Russia-Ukraine war and grains corridor. However, notwithstanding a strong El Nino and an inability to export any crops from the Black Sea, the fundamental outlook remains relatively unexciting. Supply is expected to come in strongly in 2024, while demand remains somewhat lacklustre. Stock/usage ratios are still comfortably above historical averages in 2024F.

• 2023 price assumptions unchanged, 2024 assumptions raised. While there is a high chance El Nino will be confirmed soon, we expect the impact on palm oil (PO) output to only be seen in 2024. As such, we make no changes to our 2023 CPO price assumption of MYR3,900/tonne. For 2024, if the El Nino is a moderate one, there would be an impact on supply – although not very significant – while prices could continue to be held back by lacklustre demand. We believe prices could be higher in 2H24 vs 1H24, as the impact of El Nino would only be seen from May/June onwards. We are therefore raising our 2024 and 2025 price assumptions to MYR3,900/tonne and MYR3,800/tonne respectively. If the El Nino turns out to be a strong one, we will review our price assumptions.

• We maintain our NEUTRAL sector weighting, with a tactically positive trading strategy. We believe higher CPO prices in 2024 would mean purer players would be looked upon more positively than integrated players. However, integrated players would provide a more stable earnings base and consistent dividend returns. Also, not all pure players would benefit equally, given the Indonesian tax structure and deteriorated exchange rate. Pure Indonesian planters would not benefit as much as pure Malaysian planters.

• We cut FY23-25F earnings by 4-15% post CPO price assumption revisions and after updating our latest in-house FX assumptions.

• Valuation targets rolled forward. Given our tactical view for the sector, we roll forward our valuation targets to 2024 and raise our target P/E for the regional players to 8-12x 2024F (from 7-10x 2023F) to be in line with current historical valuation averages.

• ESG overlay. Our SOP-based TP now includes a 2% ESG premium, based on an ESG score of 3.1. Wilmar is undervalued, trading at 11x FY23F P/E, below its China-listed peers’ 20-40x.

Source: RHB Research - 24 Jul 2023