3Q23 earnings of WHG were below market expectations on weak hog prices in China and the US, and also the unfavourable exchange rate.
The US upstream hog farming operations remain a drag to the overall profitability. In view of this, management admitted there is a plan for a restructuring, and mulled over the possibility of a separate listing of the US business Smithfield. While the details are yet to be decided, we believe this could be a catalyst to unlock value. However, given the US industry being in a down cycle, we expect it could take some time to realise should a separate listing is finalised and proceeded. Hence, we suggest investors to wait patiently.
Key Factors for Rating
3Q23 missed mainly on US upstream business. WHG’s 3Q23 overall revenue was down 9% YoY to US$6.4bn, while EBIT were down 25% YoY to US$305m. Both items were below market expectations, reflecting weak hog cycle in both China and the US markets. China, despite figures affected by weak USDRMB rate, was relatively well-off as EBIT still grew by 13% YoY. The overall weakness is mainly attributed by the weak upstream hog farming in the US, as unfavourable price spread between hog and pork prices continued to weigh on the segment amid rising labour and feed costs.
Mulling over the possibility of Smithfield’s separate listing. The idea was originally reported by the Wall Street Journal, and on the conference call on 24 Oct 2023, the mgmt. admitted that they have considered such possibility.
However, the details and the timing are yet to be decided. We believe this could be a positive catalyst and could unlock value for the shareholders. Yet, we believe it could ultimately depend on the hog cycles in the US for a favourable pricing. Hence, we expect it could be at least till 2H24 when factors such as taming US inflation and more favourable market sentiment start to kick in.
Waiting for the industry to bottom out in 2024. We shared mgmt.’s view on 4Q23 hog price in China that it would rebound QoQ but manageable to profitability. Hence, the group profitability would still rely on the US operations.
We expect the US operations would remain challenged at least till 1H24. Mgmt. cited the forecasts by the USDA that the number of sows would decline by 1- 3% YoY in 2024, which could be favourable to hog prices. By then, we believe the outlook and valuation of WHG could turn better.
Valuation
We cut our FY24-25E EPS by 5-6% to mainly reflect weaker US hog prices. We lift our TP to HK$5.1, based on 6.5x 2024 P/E (previous: 5.5x) as we believe the consideration for restructuring could help WHG’s valuation align more closely with other international peers in the meat product industry.
Key Risks for Rating
Hog prices in China rising faster than expected; worse-than-expected recovery in the US pork industry; sharp rise in feed cost and lower-than-expected consumer demand in packaged meat products.