Wilmar International Limited (SGX: F34) is one of Asia’s largest agricultural and food commodities companies. Its operations span the entire value chain of the agricultural commodity business, starting from cultivation, processing, distributing, to merchandising of various products.
Today it has more than 500 manufacturing plants and a sales network covering 50 countries.
In this article, we take a closer look at its businesses, latest earnings, historical financials, and competitive strengths.
Wilmar’s businesses are classified into Food Products, Feed and Industrial Products, Plantation and Sugar Milling, and Others.
Food Products segment covers the processing, branding, and distribution of various edible food items such as edible oil from palm and oilseeds, sugar, flour, rice, noodles, and others. Products are sold to end consumers in small or bulk packaging according to customers’ needs.
Range of Consumer Products in China. Source: Corporate website
Feed and Industrial Products segment includes the processing, merchandising, and distribution of animal feeds, non-edible palm products, and oleochemicals used as raw materials in the production of home and personal care items.
Plantation and Sugar Milling segment includes palm oil cultivation and processing across Wilmar’s 230,000 hectares of plantation. The group is also a major producer of raw sugar, sweetener, and sugar by-products used as an additive for livestock feed.
Others include the manufacturing of fertiliser products, port jetty operations, and investment activities.
In the first quarter of 2022, Wilmar recorded a 4.6% rise in revenue to US$10.9 billion. The higher revenue was boosted by strong sales from consumer products and downstream operations of tropical oils.
Net profit was 12.7% lower at US$224 million, due to unrealised loss in its investment securities.
However, core net profit that excludes non-operating items and changes in the fair value of biological assets grew 22.5% to US$306 million.
Source: 1Q 2020 Results Executive Summary
Cash flow from operating activities had a similarly robust growth of 15%, reaching US$306 million in the quarter.
Impact of Covid-19 Outbreak
As a producer of essential products for both food and non-food sectors, Wilmar’s operations were not significantly affected. Demand for its consumer products increased as people stayed at home, boosting household consumption. While sales of medium and bulk products to hotels, restaurants, and food processors slowed, the fall was offset by sales increase in other areas.
Essentially, the Covid-19 outbreak has shown clearly that Wilmar has a resilient business supported by inelastic demand for its products.
Wilmar has been enjoying higher revenue in each of the past five years, except for 2019 with a minimal fall. The pre-tax profit based on continuing operations had also been rising at a compounded rate of 5.3% per year.
Net gearing has maintained at a consistent level around 0.80 times. The net asset value per share grew at a compounded annual growth of 3.8% from US$2.27 to US$2.64 over this period.
Based on this, I would say that Wilmar’s business expanded steadily over the years without raising excessive loans that weaken its financial position.
Source: 2019 Annual Report
Cash Flow Trend
The group’s operating cash flow fluctuated in the past five years within the range of US$386 million and US$3.33 billion. This is typical for a commodity-based business that has large movements in inventories, payables, and receivables.
Nevertheless, it is commendable that Wilmar was able to maintain positive cash flow during this period with some market upheavals such as the oil price collapse in 2016 and the start of the US-China trade war in 2018.
Source: Self-Compiled from Annual Reports
Dividends Track Record
Wilmar’s annual dividend increased consistently year-on-year from 2015 to 2019. The payout ratio has never been higher than 45% before which is conservative in my opinion.
With its dividend of S$0.125 in 2019, Wilmar’s share has a dividend yield of 3.15% as of the time of writing.
Source: 2019 Annual Report
Strengths and Opportunities
Wilmar’s key strength lies in its comprehensive processing facilities. Its integrated manufacturing plants allow cost efficiencies through shared utilities such as boilers and storage tanks. Further cost savings are achieved by using waste products as feedstock for power generation. There is also high logistic efficiency through in-house bulk vessels and dedicated ports. These translate into high-quality products at competitive prices, allowing Wilmar to increase and protect its market share.
The group maintains a leadership position in many of its key Asian markets. It is the top consumer pack oil producer in China, India, and Indonesia, three of the world’s most populated countries. It is also the largest raw sugar producer in Australia, and the largest manufacturer of consumer pack margarine in Russia. With the region’s population still increasing, and food security being a national issue for many countries, we can expect it to expand market and revenue for Wilmar in the future.
While Wilmar has large sales volume, it has little control over the price of its products which heavily depends on the price of commodities. Commodity prices are affected by a host of factors such as geopolitical tension, inclement weather, diseases etc. Even with Wilmar’s size, it is still a price taker in the global commodity industry. Hence the risk here lies in any factors that affect macro supply and demand can impact Wilmar’s revenue.
With a closing share price of S$3.99 as at 2 June, Wilmar is trading at a price-earnings ratio of 14.2 with a market capitalisation S$25.6 billion.
I believe the group has a bright prospect due to its position as one of the region’s largest food and commodity suppliers that feed on Asia’s growing appetite. Furthermore, the group is going to further realise its business value via a listing of its China subsidiary that holds the top position in the domestic consumer pack oil market. This will be a catalyst to Wilmar’s share price in the short term.
I am also aware of the group’s weakness of being a price taker in the commodity sector. However, I believe this risk is balanced out by Wilmar’s leadership position in many markets and its status as a solid blue-chip stock.
Hence I would want to be Wilmar’s shareholder at a comfortable price to give me a sufficient margin of safety. This involves subjective valuation to ascertain a low enough price that could be different between individuals.
Right now I would place Wilmar on my watch list for the time being.