EUR 850.00 For Business Accounts Only

Morningstar | WH Group's 1Q Results in Line With Expectations; Maintain HKD 8.10 FVE

Although WH Group's first-quarter net profit fell 21%, we expect the company to be able to meet our full-year forecast for 27% growth as we think U.S. hog prices bottomed in March. This should eliminate losses related to subsidiary Smithfield’s hog production. As such, our fair value estimate remains at HKD 8.10 and we continue to project a five-year earnings compound annual growth rate of 6.8%. The U.S. lean hog price has soared nearly 60% in less than two months. While we think this is partly driven by optimistic sentiment over U.S.-China trade talks, we expect U.S. hog prices to remain buoyant throughout rest of the year as a result of supply curtailed by African swine fever in China, which should increase reliance on global imports. The improvement in U.S. contributions should help mitigate challenges in the company's packaged meat profits in China, where rising pork costs can’t be fully passed onto customers immediately. We think narrow-moat WH Group is fairly valued presently and the management’s positive guidance on the outlook for U.S. hog prices is already reflected.

China’s pig stock fell in March to its lowest level since 1992 due to the impact of African swine fever. The piglet price has risen by over 70% over the past two months, and we expect pork and hog prices to follow due to a large supply shortfall. The negative impact of these higher hog prices was seen in the packaged meat segment, which saw margins decline in the first quarter; we think this segment will continue to face margin pressure from high material costs throughput the year. However, we expect full-year margin to improve from the current level as the company has stocked up on frozen pork inventory. The company also lifted the selling price of packaged meat products in the first quarter and in April, and management guided for further price hikes. That should also help mitigate the margin pressure. The fresh pork segment benefited from a wider hog/pork spread in the first quarter with operating profit doubling that of the first quarter of 2018. However, we expect the spread to contract with hog prices rising faster in the rest of the year.

For Smithfield, the packaged meat segment achieved strong profit growth with operating margin standing at a five-year high because input costs were benign. However, we expect the margin to normalize as hog prices rise. The fresh pork segment also recorded a huge operating profit growth from a low base last year. Although we expect hog prices in the United States to stay buoyant, we remain upbeat on the fresh pork segment as we believe it will benefit from increased exports to China. We think WH Group will be the main beneficiary of any uptick in exports to China as Smithfield makes up over 75% of total U.S. pork exports to China.