Nirgunan Tiruchelvam of Altheia Capital has turned bullish on Wilmar International following news that it will be taking control of a joint venture it now runs with its partner in India Adani.
Along with improving operating margins, and an indicative dividend payout at a yield reaching a "historic high", Tiruchelvam has in his Jan 10 note upgraded his call on Wilmar to "buy" from "sell" previously, along with a target price of $3.54, up from $2.10.
Tiruchelvam had earlier noted that Wilmar is vulnerable to the unwinding of the carry trade in previous reports, and also got to bear with "excessive" leverage and poor returns.
"The stock has fallen by 30% since our initiation in August 2023. These risks seem to be priced in," he says.
In a recent development on Dec 30, the company announced plans to raise its stake in Bombay-quoted Adani Wilmar, from 44% to 75%, as the partner Adani moves ahead to focus its sprawling businesses into other areas.
Adani Wilmar is a key supplier of cooking oil, flour and other food ingredients in India and all in, Tiruchelvam has raised his ebitda forecasts for Wilmar by 9% for FY2025 and FY2026, as margins were held low in FY2023 and FY2024 because of overcapacity.
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With inventory levels of soybean oil at the lowest since 1976, the analyst expects margins to widen as a result. "The improved prospects for the core soy processing business is the cause for optimism," he adds.
Tiruchelvam also observes that Wilmar has maintained a dividend payout ratio of between 40 and 55% in the last decade. The indicated dividend yield of 5.5% is at a record high.
Furthermore, controlling shareholder Kuok Khoon Hong has been known to steadily accumulate additional shares at around $3, where Wilmar is trading now.
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"The chances of insider buying are strong due to the falling interest rates. The dividend yields are even more attractive due to the possibility of rate cuts," suggests Tiruchelvam.
Wilmar International shares changed hands at $3.03 as at 3.03 pm, down 0.33% for the day.
