This sets the valuation ball rolling. This implies a valuation of US$15.5bn for Wilmar China. KG will, within three days of being notified, top up the difference with the IPO price should the IPO valuation be higher than its subscription price.
Our assumptions are close! Assuming that Wilmar China contributes to half of Wilmar International’s earnings, this would lead to a valuation for Wilmar International that is about 6% higher than our valuation target. We had assumed a 25x earnings multiple for Wilmar China and 15x for the rest of its business, leading to a 20x blended multiple for Wilmar International and thus a target price of S$6.50 for the stock. Wilmar International plans to add ‘domestic ownership’ to its Chinese unit through the IPO – this should help the company outpace foreign competitors constrained by rules introduced last year that limits capacity expansion.
Sustainability of earning base or rapid growth? The key for us as more details of its IPO come through is an evaluation of Wilmar International’s earnings growth profile. The stock’s rerating since May (when news of its proposed IPO was released) implies that the IPO event will quickly transform Wilmar International into a fast-growth firm.
12-month price target: S$6.50 based on a PER methodology. We believe Wilmar has rerated since 4Q08 because the company has proven that not only is it capable of circumventing some of the harshest conditions in credit and commodity markets, but it is able to do so while maintaining strong profitability levels.
We downgraded the stock to Neutral on valuation grounds in our 20 August note, Pricing in the IPO option. Our target price of S$6.50 for Wilmar International implies 20x FY09E earnings.
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