Wilmar - Value potential from a Hong Kong listing

China’s imports of vegetable oils exhibited a strong recovery in Q2 as soy and palm oil volumes grew over 40% and 55%, respectively, in May YoY. We expect this to be reflected in Wilmar’s Q2 results. We draw a parallel with Taiwan (which has a similar dining pattern), and conclude there is significant potential for China to increase its per capita consumption of vegetable oils in the future.

Despite its significant China operations and the dual listing in Hong Kong, we believe the market will continue to perceive Wilmar as a foreign company in China. As such, we do not see any immediate advantages from the local listing in relation to China's strict anti-monopoly laws on foreign food processors.

There is, however, a two-fold value potential from a dual listing. Firstly, it gives investors access to invest purely in Wilmar’s China operations, which we think would trade at a higher multiple than the Singapore-listed entity. Secondly, if reinvested in the company, capital raised (US$2.3-2.8bn by our estimates) could enable Wilmar to grow earnings above consensus estimates in the medium term.

We upgrade our rating for Wilmar from Neutral to Buy and raise our price target from S$4.42 to S$7.00. We derive our price target using DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool, while incorporating a WACC of 8.32%. We raise our 2010/11E EPS from US$0.21/0.24 to US$0.26/0.30 as we assume a long-term gross margin of 9%, up from 6% previously.

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