Wilmar International: It's All About Margins

seekingalpha04-11

A potential negative surprise for Wilmar International could come in the form of delayed rate cuts and elevated finance costs.On the flip side, WLMIF's profit margins might be boosted by a recovery in...

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Hleb Usovich/iStock via Getty Images Elevator Pitch Wilmar International Limited (OTCPK:WLMIF) (OTCPK:WLMIY) [F34:SP] shares are assigned a Hold investment rating. In my prior update written on November 28, 2023, I touched on Wilmar International's valuations, profitability outlook, and its new central kitchen business. The focus of the current article is the key factors influencing the company's margins for 2024. I have a mixed view of Wilmar International's expected margins and earnings in this fiscal year, and this justifies a Hold rating on the stock. While the company's margins might be boosted by the potential recovery in its key market, China, there is a risk that elevated finance costs hurt its bottom line. The company's shares can be bought or sold on the OTC market and the Singapore Exchange. Wilmar International's Singapore-listed shares and OTC shares boasted average daily trading values of $15 million and $150,000, respectively for the past three months as per S&P Capital IQ data. Interactive Brokers is one of the US stockbrokers that offer trading services for companies listed on the Singapore Exchange. All Eyes On Finance Costs And Potential Rate Cuts Wilmar International's top line declined by -8.5% to $67.2 billion in fiscal 2023, but its net profit attributable to shareholders fell by a wider -36.5% to $1,524.8 million in the most recent fiscal year. A key reason for the larger drop in WLMIF's earnings relative to its revenue is the sharp increase in finance costs last year. In specific terms, the company's finance costs jumped by a substantial +43.5% to $1,251.5 million for FY 2023. The sell side analysts currently estimate that Wilmar International's net income attributable to shareholders will increase by +12.3% to $1,711.8 million (source: S&P Capital IQ) in the current fiscal year. It is reasonable to think that WLMIF's actual finance costs for FY 2024 will have a significant impact on its profitability this year. The company issued an announcement in late February 2024 responding to the Singapore Exchange's query on its finance costs. Wilmar International explained in its February 28 announcement that the increase in the company's finance costs was attributable to a \"higher interest rate environment globally\" where \"higher US Federal Funds rates led to an increase in our Group’s USD borrowings.\" A recent April 4, 2024 Seeking Alpha News article cited comments from the \"President of the Federal Reserve Bank of Minneapolis Neel Kashkari\" noting that \"there could be no rate cuts\" in 2024 assuming inflation remains sticky. Earlier on March 27, 2024, Seeking Alpha News reported that \"Federal Reserve Governor Christopher Waller\" is of the view that the Fed should be in \"no rush\" to initiate rate cuts. Considering these comments presented above, it is reasonable to think that the Fed's actual rate cuts might possibly happen later or be of a smaller magnitude. In the company's February 28, 2024, announcement, WLMIF emphasized that \"we expect our net finance cost to have peaked in FY 2023.\" It is likely that Wilmar International's view on its future finance costs would have been factored into the analysts' financial projections. As such, assuming that the Fed delays or reduces the magnitude of its rate cuts, the company's actual FY 2024 earnings might possibly disappoint the market due to above-expectations finance costs. China's Potential Economic Recovery Is In The Limelight In my late-November 2023 write-up, I cited a research report from CGS-CIMB noting that \"downtrading activities for its consumer products sub-segment in China\" had hurt Wilmar International's profitability. This suggests that WLMIF's actual profit margins could surprise on the upside in the scenario that the Chinese economy recovers and consumer sentiment in the country improves. In its 2023 annual report recently released on March 28, 2024, Wilmar mentioned that \"consumer sentiment and spending in countries such as China should continue to improve into 2024\" as part of the outlook statement for its food products business. Its food products business sells a wide range of cooking oil products. Separately, there are signs indicating that the worst might be over for China's economy. China's \"NBS Composite PMI Output Index\" improved from 50.9 in February 2024 to 52.7 for March this year, which represented its best reading in the past 10 months as indicated in an April 1, 2024 Seeking Alpha News article. Also, an April 8, 2024 Bloomberg report highlighted that \"Chinese (domestic) tourists spent more per trip over a holiday than in 2019 for the first time since\" COVID-19 for China's Qingming Festival holiday this year. China is Wilmar International's biggest market, accounting for 52% of its FY 2023 top line as revealed in its annual report. Therefore, it is highly probable that WLMIF's profit margins this year could benefit from positive operating leverage (faster revenue growth in the China market) and price increases (greater potential to raise consumer product prices when Chinese consumer sentiment is favorable). Thoughts On First Quarter Results Wilmar International recently announced on April 8, 2024, that it will reveal its financial performance for the first quarter of the current year on April 29. As a company with a primary listing on the Singapore Exchange, Wilmar International only discloses its complete financials twice every year. The company's voluntary first quarter and third quarter disclosures in the past tended to be brief, focusing on key headline financial items like revenue and earnings. I am predicting in-line Q1 2024 earnings for Wilmar International. On one hand, elevated finance costs could still be a drag on the company's profit. On the other hand, the Chinese economy's recovery might boost WLMIF's profit margins to some extent. Concluding Thoughts A review of recent news flow and management commentary doesn't change my Neutral rating for Wilmar International. The stock's margin outlook remains unclear, taking into account factors like finance costs and the strength of the Chinese economy.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426440685"}