Farming is one of the world’s oldest occupation and a vital one as it puts food on the table. Implemented on a large scale, agriculture becomes one of the primary industries that provide basic ingredients that are used to produce food in bulk and sold to retail consumers or farms as feedstock. With the mega trend of growing world population especially in Asia, agriculture is big business.
In SGX, we have one of the world’s largest agribusiness group with over 500 manufacturing plants and an extensive distribution network covering China, Indonesia, India and 50 other countries. It is none other than Wilmar International Limited (Wilmar), a Straits Times Index constituent and a company related to Robert Kuok.
Ticker Symbol: F34
Industry: Food, Beverage, and Tobacco
Market Capitalisation: S$ 20.56 billion
Wilmar’s business includes palm oil cultivation, oil seed crushing, edible oils refining, sugar milling and refining, manufacturing of consumer products, specialty fats, fertilisers, and flour and rice milling. It is an integrated agribusiness that that covers the entire value chain of the agricultural commodity activities ranging from cultivation, processing, manufacturing and merchandising.
Source: Wilmar FY2017 Annual Report
It is worth noting that Wilmar commands a market leading position in China as the largest edible oils refiner and merchandiser with its Arawana brand cooking oil. It is also the largest producer of branded consumer pack oil in Indonesia.
In Financial Year 2017, its revenue, net profit and total assets were $43.8 billion, $1.2 billion, and $40.9 billion respectively.
Tropical Oils Division
As one of the largest palm oil plantation owners globally, it boasts a total planted area of 239, 935 hectares spread across Indonesia, Malaysia and Africa. This segment covers the palm oil assets and from plantation, palm oil mills, to processing, distributing and merchandising of palm oil and laurics related product. In FY2017, pre-tax profit amounted to US$426.2 million.
Oil Seeds and Grains Division
This segment consists of processing, branding and distributing of agricultural products such as edible oils, oil seeds, flour and rice. China is a big market here. The total volume of soybeans crushed in China increased to about 87 million Metric Tonne in 2017. This is underpinned by the trend towards a more protein-based diet, and the modernisation of pig-farming industries. In 2017, this division achieved a pre-tax profit of US$735 million.
Wilmar is also a leading sugar producer involved in sugarcane cultivation, milling and refining of various sugar products. It is a leading sugar refiner in Australia, with about 60% of the market share, and one of top three refiners in Indonesia. However, this division suffered a pre-tax loss of US$24.6 million in FY2017, impacted by a weaker performance from the merchandising, refining and consumer product business caused by larger supply than demand that depressed sugar pricing.
Latest Quarterly Earnings
Wilmar has recently released its 2Q 2018 earnings. Let’s take a closer look.
Quarterly revenue improved 2% to $10.79 billion. Core net profit exploded for a 437% increase to $316 million. As a result, Earnings per Share increased 456% to USD 5 cents on a fully diluted basis.
Wilmar also decided to share the fruits of its profits with its shareholders, by dishing out a 3.5 cents dividends which are a 17% increase from 2Q 2017.
Source: Wilmar 2Q 2018 Results Presentation
Tropical Oils segment saw a 165% increase in Profit before Tax (PBT) to US$154.9 million, due to better performance from the midstream and downstream operations. Higher crude oil prices benefitted the oleochemicals and biodiesel businesses while specialty fats business also expanded as a result of an increase in global demand during the quarter.
Oilseeds and Grains segment also performed well, by achieving a 381% increase in PBT to US$290.2 million, due to higher volume, good crush margins and growth in Consumer Product business.
However, Sugar segment is still in a loss-making position, although it managed to shrink its PBT to US$46.2 million loss. Sales volume increased in 2Q due to new Australian sugar marketing programme introduced in 2017.
Soybean import from the US to China is impacted by the ongoing trade tariffs. As a major oilseeds crusher in China, there are some concerns about Wilmar’s profitability currently.
Management acknowledges the risks posed by trade tensions, and has this to say:
‘trade tensions between the US and China improved crush margins in the short term, thus benefitting our oilseeds crushing business. However, a prolonged dispute between the two countries will have a negative impact on crush margins due to lower plant utilisation. Nevertheless, we expect our other businesses such as consumer products, rice and flour milling to perform reasonably well in the coming quarters.’
On Tropical Oils segment, management commented that while low palm oil price will negatively impact earnings, its downstream businesses would benefit from increased demand and better margins.
As for Sugar segment, management is sanguine that performance would improve in the second half of the year, with the commencement of crushing season in June.
Overall, management sounded ‘cautiously optimistic that performance for the rest of the year will be satisfactory.’
With a 2017 Earnings per Share of US$0.193 and 14 Aug closing price of $3.25, based on exchange rate of 1USD to 1.3801 SGD, Wilmar is trading at a PE Ratio of 12.2.