With reference to its peers, we expect WHG’s 4Q22 would be under more pressure than previously expected, especially for its US operations. However, we expect that the impact to earnings should be manageable through its process improvement, as well as smoothening by the pre-tax disposal gain of US$467m. On the other hand, we expect the China operations would not be that bad, as it could monetise the opportunities in the hog cycle while impacts of Covid would not be that significant. In face of its undemanding valuation, we reiterate BUY.
Key Factors for Rating
US operations in 4Q22 face rather strong headwinds. For 4Q22, WHG already faced a high base in 4Q21, an exceptional quarter in terms of profitability. Then with reference to the peers of WH Group such as JBS (JBSS3 BZ, Not Rated) and Tyson Foods (TSN US, Not Rated), we expect that meat producers in the US could face a stronger-than-expected headwind in 4Q22.
While inflation could hit the demand on premium products, it also weighed on the production cost, particularly in the hog farming and slaughtering segment.
In addition, bad weather in Dec 2022 could also make the situation worse, adding more pressure to margins and overall EBIT.
China’s pressure eased by frozen pork reserves. While China was under tight lockdowns in 4Q22 and affected demand, we expect WHG could offset by monetising the imported pork reserves. As pork prices rallied in Oct-Nov 2022, WHG could sell these cheap imported products. Meanwhile, we do not expect falling pork prices since Dec 2022 could WHG. Rather, it could benefit from higher GPM in 2023 due to its strong price power and lower COGS, in our view.
2022 profits supported by one-off disposal gains. Despite such headwind in 4Q, WHG managed to dispose of Saratoga Foods Specialty, the US business unit on spices and seasonings for US$588m. This would allow WHG to book a disposal gain of US$467m before taxes and other costs. We now expect the actual bookable after-tax gain would be c.US$300m, equivalent to 21% of our latest 2022 NP. Excluding one-off items like this, we expect that WHG’s core operating profit could grow by 15% YoY to US$2 billion in 2023 (as opposed to 11% YoY decline of reported NP), which we deem not bad. In the long run, we expect WHG’s NP could achieve a CAGR of 9% between 2021 and 2024.
Valuation
We lowered our 2022 EPS estimate by 7% mainly on weaker US operations and higher taxes related to disposal gain, but raise our EPS for 2023 on better outlook in China after the easing of Covid restrictions since Dec 2022. Maintain BUY with a new TP of HK$6.2, based on 8x 2023 P/E (unchanged).
Key Risks for Rating
Hog prices in China rising faster than expected; sharp rise in feed cost and lower- than-expected consumer demand in packaged meat products.