WH Group shares have declined stronger than the market over the past year despite a good 2022 report in which revenues were up 3.1% YoY and net income to shareholders increased by 28% YoY. The stock has underperformed the market due to unfavorable market conditions and high costs of its US pork business, which caused the company’s 1Q23 profit to decline by 66% YoY. At the same time, the company maintains a positive long-term business outlook and sees opportunities to improve profitability through process automation, cost control, product mix optimization and selling price control.
The 12-month target price for WH Group shares is HKD5.5, up 30.6% from the current price, with a ‘Buy’ rating.
The 12-month target price for WH Group shares is HKD5.5, up 30.6% from the current price, with a ‘Buy’ rating.
WH Group is a vertically integrated pork products manufacturer with assets in China, the USA and Europe. Additional business areas: logistics business, poultry, food additives and colourings and management of a chain of retail food shops.
Food demand resilience. Since listing on the Hong Kong Stock Exchange in 2014, the company has grown revenue at a CAGR of 3.0% and net profit at a CAGR of 7.5%.
In 2022, revenue rose 3.1% YoY to $28.1bn and net profit for shareholders rose 28% YoY to $1.4bn, with earnings before interest and taxes (EBIT) expanding 6.5% YoY to $2.1bn. Net profit was impacted by the sale of spice producer Saratoga and lower other expenses.
It offers a decent dividend yield of 7.4%, with a payout ratio of at least 30% of net income.
Vertical integration provides more control over the supply chain, mitigates risk, and allows NTM to earn added value at different stages of sales.
A presence in China, the USA and Europe enables a diversification of geographical risks.
M&A activity. The company is actively involved in strategic transactions, particularly in Europe. For example, in early 2023, the company acquired Romanian packaged meat producer Goodies Meat Production.
The strategic focus in the US, where operating margins fell in 1Q23 due to a glut in the pork market, is to control costs and improve efficiency through automation. Such measures saved the company $70m last year.
To calculate the target price, we used a valuation based on NTM’s projected P/E multiple relative to peers and our own historical forward P/E and EV/EBITDA multiples (two-year median) and dividend yield. Our valuation implies a 30.6% upside in a 12M perspective.
Among the risks we note that the company expects pressure on its financial results in the short term due to high energy prices and cooling demand. The weak 1Q23 report is mainly due to difficult market conditions in the US, where costs of raising pigs remain high and pork prices have negatively impacted consumer demand. The market expects WH Grop’s earnings to decline by 27% YoY in the current year.
Description of the issuer
WH Group is one of the world’s largest pork producers and suppliers. The company specialises in breeding, slaughtering and processing pigs, as well as the production of semi-finished pork products. Its markets include China, the US, Mexico and Europe, where it is known under the Shuanghui, Smithfield, Krakus and other brands. The product range includes pork meat and meat products, including sausages, ham, bacon and other pork delicacies.
The securities have been traded on the Hong Kong Stock Exchange (HKEX) since 2014 and have been included in the Hang Seng Index since 2017. The securities are also available for trading on the SPX Exchange.
Free float is 61%, with major outside investors including Mondrian Investment Partners (6%), BlackRock (2.4%) and Vanguard (1.8%).
Attractiveness factors
WH Group is one of the world’s largest pork producers, enabling the company to compete confidently in the industry and capitalise on growing global demand for pork.
The company has well-established brands that are recognised by consumers and create added value that supports its market position and sales.
Global presence and diversification through operations in China, the US and Europe. This provides diversification of geographic risk and offers the opportunity to participate in markets with different economic conditions. The global presence allows the company to take advantage of various expansion opportunities.
Vertical integration. WH Group controls the entire supply chain, including pig breeding, slaughtering, processing and distribution. This provides greater control over the supply chain, allows for levelling of risks, earns added value at different stages of sales, provides greater operational flexibility, and allows for better control over product quality.
Growing demand for pork, especially in developing countries where average incomes and meat consumption are increasing. WH Group can take advantage of this trend and increase its profits.
The company is seeing a recovery in demand in China after the covid, particularly among tourism-related businesses, restaurants and schools.
Sustainability of food demand. Food products such as pork are in stable demand even during periods of economic instability, particularly in China, where pork is one of the basic products. This can be particularly attractive to investors looking for stability and long-term returns. Since listing on the Hong Kong Stock Exchange in 2014, the company has been growing revenue at a CAGR of 3.0% and net profit at 7.5% CAGR.
Strategy
The company is pursuing a strategy of “managing pricing, improving product mix and controlling costs” to take advantage of industrialisation, scaling, diversification and automation in order to maintain an industry-leading position and ensure sustainable development.
Strategic priorities in China
- Improve the vertically integrated pork business model.
- Expansion of our poultry business: poultry consumption growth is outpacing that of pork.
- Improved management through the use of data and information technology.
Strategic priorities in the US
- Implement a genetic improvement plan for the herd, which will reduce costs and improve pork performance.
- Optimization of product range to increase profitability, stimulate sales.
- Optimising the technological process to improve production efficiency, reduce costs and offset the effects of labour shortages. Last year, such measures saved the company around $70 million.
Strategic priorities in Europe
- Optimize product mix, pricing, cost and efficiency measures to reduce inflationary pressures and labour costs – Expand poultry business.
- Integration of recently acquired businesses. In February 2023, the company bought Romanian packaged meat producer Goodies Meat Production.
The company pays a dividend twice a year on a semi-annual basis. NTM’s forecast dividend of HKD 0.31 offers a good dividend yield of 7.4%. The payout rate for the last 5 years is 37% of net profit and the policy is to pay at least 30% of net profit.
Financial results
The company earns half of its revenue from pork production, but 99% of its operating profit comes from meat processing.
Results for 2022 were affected by animal disease outbreaks, rising food and energy prices, significant fluctuations in pork and meat prices and the appreciation of the US dollar.
In 2022, revenues moderated by 3.1% YoY to $28.1bn and net income increased by 28% YoY to $1.4bn, with EBIT up 6.5% YoY to $2.1bn. Net income was impacted by the sale of spice producer Saratoga and lower other costs.
Pork
In the pork industry, revenues declined by 1.4% YoY to $11.8 billion in 2022, negatively impacted by lower pork prices in China, lower sales volumes in Europe and the effect of foreign currency translation. Revenues in the US and Mexico improved due to the consolidation of GCM’s Mexican business, a favourable change in assortment in the US.
The number of pigs processed in 2022 fell by 3.5% YoY to 48,915,000 head due to reduced supply of pigs on the market and labour market constraints in the US and Mexico. In Europe, herd processing fell by 15% YoY due to African swine fever (ASF).
Segment EBIT was $30 million (about 1% of Group EBIT), increasing tenfold.
Meat processing
Meat Processing revenue in 2022 increased by 5.4%, to $14.6 billion, driven by a 0.7% YoY increase in sales to 3,344 thousand tonnes and higher prices.
Segment Earnings before Interest and Tax (EBIT) increased by 9% YoY to $2,065 million, mainly due to improved operational efficiency and higher revenues in the US (EBIT +19.5% YoY). EBIT was negatively impacted by a 10.2% decline in Europe due to the depreciation of the local currency against the US dollar.
More than half of our capital expenditure last year ($554 million out of $975 million) was invested in three vertically integrated poultry and two pork complexes in China. Capital expenditure in the US ($338 million) was on maintenance, automation and operational cost reduction projects.
Risks
The company expects pressure on financial results in the short term due to high energy prices and cooling demand. The weak 1Q23 report is mainly due to difficult market conditions in the US, where costs of raising pigs remain high and pork prices have negatively impacted consumer demand. For example, in 1Q23 net income fell by 66% to $194 mln, the market expects earnings per share to decline by 27% YoY for the current year.
Inflation and lower purchasing power in the markets where we operate could significantly affect meat sales by switching to cheaper meats or substitutes, such as plant-based proteins.
Epidemics such as ASF can have a significant impact on the Group’s financial performance. They lead to sharp movements in commodity prices, which affects the company’s revenue and expenses. Disposal of sick herds can hit future revenues, increasing replenishment costs.
Valuation
We used a comparative approach, including valuation by multiples relative to peers and our own historical forward multiples, as well as share price analysis by projected dividend yield, to estimate the target value of WH Group shares.
Valuation by multiples relative to peer companies.
Value analysis on intrinsic dividend yield
WH Group has a target capitalisation of HKD 56bn, or HKD 4.36 per share, with a forecast DPS NTM of HKD 0.31 and a target DY of 7.1%, according to our estimates.
WH Group’s average 12-month capitalisation target is HKD 70.3bn, or HKD 5.5 per share, which is 30.6% higher than the current price, with a Buy rating, according to our estimates.
The average target price of WH Group shares according to a sample of analysts with historical accuracy of at least average forecasts is HKD 6.7 (upside of 60% from current levels), and the stock rating is equivalent to 5 (where 5 is Strong Buy, and 1 is Strong Sell), according to our calculations.
Macquarie Research’s target price estimate for WH Group shares is HKD 7.8 (“Buy”), ABCI SECURITIES is HKD 6.2 (“Buy”), and China International Capital Corporation is HKD 5.5 (“Buy”).
Stocks in the stock market
WH Group shares have underperformed the broader Chinese market over the past year, as represented by the Hang Seng Index on the chart below, although the 2022 report was stronger than expected: revenues improved by 3.1% YoY to $28.1bn against expectations of $27.4bn and net income to shareholders rose to $1.4bn (+28% YoY) against consensus of $1.37bn. In our view, this lag represents a nice upside opportunity for the stock. The market valuation already includes a 27% YoY decline in earnings in FY2023.
Technical analysis
On the weekly chart, WH Group shares have exited the oversold zone, finding support near the local low near HKD 4. Downtrend line at HKD 4.6-4.8 will be the upside target. On a break of the trend line upwards, resistance will be at HKD 5.0.
Prices and other market data are given at the time of writing, released on 26.06.2023.
