Wilmar (SGX:F34) is in the midst of spinning off Yihai Kerry Arawana in the ChiNext of Shenzhen Stock Exchange. This could be one of the reasons that drove Wilmar’s share price up by 43% from the low of $2.90.
Wilmar will sell about 10% of the enlarged share capital, or 542,159,154 shares, in Yihai Kerry Arawana to the public. Unfortunately foreign investors are unable to buy this IPO because ChiNext stocks are currently excluded from the Shenzhen-Hong Kong stock connect. Wilmar shareholders would not be receiving shares in Yihai Kerry Arawana as it remains a subsidiary of Wilmar (89.99% ownership). Nonetheless, Wilmar shareholders have already enjoyed some price gains and could continue to see more upside after the spin-off.
The purpose of this spin-off is to fund Yihai Kerry Arawana’s expansion capital expenditure. The IPO price has yet to be set but Yihai Kerry Arawana has indicated to use proceeds of ¥13.87bn. This means an approximate IPO price of ¥25.59 but likely to be higher if we add in the listing fees. This would be a PE of 25x. Wilmar’s PE is about 15x and hence, this spin-off should unlock the value in Yihai Kerry Arawana.
According to Nielsen data, Yihai Kerry Arawana ranked first in the market share of edible vegetable oil, flour and rice in China. The company also ranks high in the market share of feeds trade and oils and fats industries. Hence, they must be getting something right and it makes sense to have Yihai Kerry Awarana to shine on its own.
The table below shows Yihai Kerry Arawana’s revenue and profits in the past 3 years. The net profits grew about 5% annually. This isn’t an exciting growth stock but a more of a slow grower.
| RMB ‘000 | 2019 | 2018 | 2017 |
| Revenue | 170,743,420 | 167,073,520 | 150,766,280 |
| Operating Profits | 7,068,670 | 6,731,240 | 5,919,050 |
| Net Profits | 5,563,640 | 5,516,940 | 5,283,660 |
How would Wilmar shareholders benefit?
Earlier we mentioned that a spin-off would allow both Wilmar and Yihai Kerry Arawana get a better valuation from the stock market.
We can do some numbers to see the benefits.
I always like to refer to Joel Greenblatt’s You Can Be A Stock Market Genius when it comes to major corporate actions such as this.
Greenblatt would consider this a partial spinoff because Wilmar would retain the majority of Yihai Kerry Arawana stock even after the listing. Below is an excerpt from the book about partial spinoffs,
The benefits of investigating partial spinoffs are twofold. First, in the case where shares in the partial spinoff are distributed directly to parent-company shareholders, spinoff shares should perform well for most of the same reasons that 100-percent spinoffs do. In the case where a partial stake in a division is sold directly to the public (through an Initial Public Offering, known as an IPO), your opportunity is probably not as good. This is because the people who buy stock in the public offering are not being handed stock they don’t want. A stock price depressed by indiscriminate selling is therefore not likely. Your second opportunity comes from something else. Here’s where you break out your first-grade math skills.
Once the stock of the partial spinoff is publicly trading, the market has effectively valued the spun-off division. If the Widget division of XYZ Corporation has 10 million shares outstanding and 2 million are sold to the public for $20 per share, that means XYZ still owns 8 million shares of Widget. The value of those shares works out to $160 million (8 million shares multiplied by a $20 share price—okay, second-grade math). Now comes your second opportunity. By doing this simple math, you now know two things. Of course, you know the value of XYZ’s 80-percent stake in Widget—$160 million. However, you also know the value the market places on all the rest of XYZ’s businesses: that value is equal to the market value of XYZ less $160 million. Here’s how it works: If XYZ has a market value of $500 million, and its 80-percent Widget stake is valued by the market at $160 million, that implies a net value of $340 million for the rest of XYZ’s businesses.
Let’s do the math together.
Yihai Kerry Arawana’s estimated market capitalisation post IPO = ¥138.7 billion or S$27.38 billion
Wilmar’s current market capitalisation = S$26.25 billion
89.99% of Yihai Kerry Arawana’s market capitalisation = S$24.64 billion
Market valuation of remaining businesses of Wilmar = S$1.61 billion
Intuitively it didn’t feel right to value Wilmar’s remaining upstream business, which includes vast acres of oil palm plantations, for S$1.61 billion only!
Hence, Wilmar share price could have more room to go up after the listing of Yihai Kerry Arawana because it will force the stock market to see the value in both companies separately, and avoid the curse of conglomerate discount.
DBS Group Research used a different method – blended PE multiples to forecast Wilmar share price depending on Yihai Kerry Arawana’s IPO PE ratio. The analyst believe that a PE of 22x is likely and derived a Wilmar target price of $4.61. If the PE goes to 25x, the share price of Wilmar can go to $5.04.
Lastly, Greenblatt said that spinoffs and their parents generally performed well thereafter,
“One study completed at Penn State, covering a twenty-five-year period ending in 1988, found that stocks of spinoff companies outperformed their industry peers and the Standard & Poor’s 500 by about 10 percent per year in their first three-years of independence. The parent companies also managed to do pretty well—outperforming the companies in their industry by more than 6 percent annually during the same three-year period. Other studies have reached similarly promising conclusions about the prospects for spinoff companies.”
In conclusion, this spinoff is going to be good news for Wilmar and shareholders should be happy to see some capital appreciation in time to come. Given the strong branding of Yihai Kerry Arawana, and coupled with only 10% float, I am confident that Wilmar can maximise the IPO price and receive over-subscription. A higher IPO price would drive Wilmar’s share price upwards, barring other major negative events.