FY20 adj. NP fell 29% to US$973mn, 21%/10% below consensus/our estimates, due to weak US results. That said, US business had huge exceptional losses in FY20 (COVID-19 related costs, inventory provision, etc.). As US economy is continuing to open up and 2021 forward hog futures prices are higher than corresponding prices in 2019 (Figure 3), US business should have a strong recovery in FY21E. We lift our SOTP-based TP from HK$9.30 to HK$9.60. The stock trades at 9.7x FY21E adj. P/E, lower than historical average of 11.0x. We forecast WH to post record high adj. NP in FY21E. Share price is 26% below record high on 1 Feb 2018. Maintain Buy on undemanding valuation.
- FY20 results missed due to exceptional items. Revenue rose 6% to US$25.6bn, in line. Payout ratio maintained at 40%. (1) China: segment profit climbed 19% to US$1,140mn, in line, driven by 24% OP growth of packaged meat business. OP/tonne of packaged meat increased 25% to RMB3,634 after prices hikes in FY19. Pork business (fresh pork and hog production) OP increased 9%. (2) US: segment profit slumped 55% to US$415mn, missed our estimates, mainly due to US$820mn COVID-19 expenses, ~US$110mn one-off items (litigation compensation and pension related) and ~US$187mn increase of inventory provision. Pork business recorded US$33mn operating loss (vs US$233mn OP in FY19) on weak hog price. Packaged meat business OP fell 33% due to 4% volume drop and inventory provision. (3) Europe: segment profit rose 23% to US$174mn, in line, driven by 70% OP growth of packaged meat business.
- China segment profit to grow 5% in FY21E. Management expects hog price to drop in FY21E, with 2H average price less than 1H. Packaged meat OP/tonne would increase steady on declining hog price. For fresh pork, OP is expected to drop due to less frozen pork import and narrowing pork price spread between China and US.
- US segment profit to surge 108% in FY21E. Firstly, management expects COVID-19 related costs to be reduced by US$650-700mn in FY21E. Secondly, in FY20, the US$110mn litigation compensation and pension related expenses were one-off. Thirdly, the increase in inventory provision was mainly due to COVID-19. We think such provision would notably drop in FY21E. Thanks to strong hog futures prices, we expect hog production business could be breakeven at least (vs US$197mn loss in FY20) despite rising feed costs.
- Maintain Buy. We raise FY21/22E adj. NP estimates by 6%/1% because we are more positive in US market outlook. Our SOTP-based TP was raised from HK9.30 to HK$9.60, representing 12.9x FY21E adj. P/E. Catalysts: (1) acceleration of vaccinations in US; (2) hog price drops in China.
