Wilmar International Limited

Founded in 1991, Wilmar International Limited was listed via an RTO (reverse takeover) of Ezyhealth Asia Pacific Limited in 2006 at S$0.80 raising US$180 million with a focus on the palm oil business.

Post-2006, Wilmar has grown by leaps and bounds. Today, other than being one of Asia’s largest integrated palm oil players, Wilmar is also one of the largest oilseeds and grains crushers in China, amongst the world’s top 10 raw sugar producers (after acquiring Sucrogen Limited in 2010) and also a leading branded consumer pack producer. At a point in time during the peak of the ‘commodity supercycle’, Wilmar was briefly the company with the largest market capitalization on the Singapore Exchange!

Fun fact: Wilmar probably came about from the combination of its two founding Executive Directors – William Kuok Khoon Hong and Martua Sitorus.

STOCK INFORMATION

TICKER SYMBOL: SGX:F34
MARKET CAP: SGD 18 Billion (Updated 1 Jan 2016)
MARKET PRICE / SHARE: SGD 2.83 (Updated 1 Jan 2016)
SECTOR: Consumer Products
INDUSTRY: Agri-Business

THE BUSINESS

In the past, the ABCDs – Archer Daniel Midlands Company, Bunge Limited, Cargill Inc and Louis Dreyfus Commodities dominated the global flow of food commodities. However in recent years, the NOWs (the Asian equivalent) have risen up to the challenge. Coincidentally, all 3 of them are listed on SGX:

-Noble Group Limited
-Olam International Limited
-Wilmar International Limited

Back then, Wilmar was just an integrated oil palm player. However today, they are one of the giants in the agri-business world doing mroe than just CPO. Here’s a quick rundown of their Top 4 Business Segments:

 

1. Palm Oil Operations (US$20 billion | 46% of FY2014 Rev)

This was and still is one of Wilmar’s key pillars. An integrated palm oil operation includes:

-Upstream:
Cultivation of oil palm plantations, harvesting of Fresh Fruit Bunches (FFB) to the milling of FFB for Crude Palm Oil (CPO) &

-Downstream:
Refining CPO to specialty fats, oleochemicals and even biodiesel!

For those unfamiliar, CPO is the most used edible oil in the world. You use it every time you brush your teeth, wash your hair, scrub your plates and its even in your ice cream. Relative to other vegetable oils (soybean, rapeseed, olive, etc.), it’s cheap, versatile, and yields way more oil (on a per hectare basis). With planted area of 238,287 hectares (2014), Wilmar was amongst the Top 10 listed Southeast Asian oil palm upstream players. And with 85% (FY2015) of CPO produced in Malaysia and Indonesia, this was definitely where the big boys played. For upstream operations, Wilmar cultivates, harvests and processes the FFB in their mills producing CPO. This is where upstream processes end. If companies do not have downstream operations, they derive revenue from selling this CPO as raw materials to either downstream producers and/or traders like Wilmar, ADM, Bunge, etc. and consumer companies like Unilever, P&G, etc.

Next, downstream operations. ~100% of Wilmar’s upstream flows to their downstream. And Wilmar is the largest global processor and merchandiser of palm and lauric oils. For a simpler introduction of downstream operations, it might be more helpful to tell you some of the end products involved.

Some of these end products are:
– Soap
-Detergents
-Food ingredients
-Biodiesel

 

2. Oilseed and Grains (US$11 billion | 26% of FY2014 Rev)

Oilseed and Grains refer to the merchandising (make sure the right things get to the store) and processing (making it into stuff that can be sold to their customers) of a wide range of edible oils, oilseeds and grains.

Oilseeds operations include:
-Crushing of soybean, rapeseed, groundnut, cottonseed, sunflower seed and sesame seeds into protein meal (animal feed) &
-Crude oils (which Wilmar sells it to its own consumer products division).

Did you know that Wilmar is the largest oilseed crusher, edible oil refiner and speciality fats and oleochemical manufacturer in China? Anytime one is the largest player in China, especially for a foreign based company, speaks volumes about their reputation.

 

3. Sugar (US$4 billion | 9% of FY2014 Rev)

Although sugar is their newest pillar, you could say that William Kuok is no stranger to this industry. Back in the days, until his uncle Robert Kuok sold his sugar business to FELDA (in 2009),  he was known as the ‘Sugar King of Asia’. Since Wilmar’s US$1.5 billion acquisition of CSR Limited’s Sucrogen Limited in 2010, things have come full circle. In one fell swoop, Wilmar became the largest raw sugar producer and refiner in Australia. And they didn’t stop there.

In 2013, Wilmar spent US$263 million to acquire a 27.5% stake in Cosumar S.A. (valuing 100% of the company at ~US$1 billion), Morocco’s sole sugar supplier. The company is also the third largest sugar producer in Africa, owning one of the largest refineries in the world. This gave Wilmar an annual production capacity of ~2 million MT over 5 refineries across Australia, New Zealand and Indonesia. Since 2010, Sugar has come up the ranks  accounting for ~9% of Wilmar’s FY2014 PBT.

 

4. Consumer Products (US$7 billion | 16% of FY2014 Rev)

Wilmar is also the world’s largest (this is becoming a common theme) producer of consumer pack edible oils.

The stats speak for themselves:
-44% in China (largest) through Arawana brand
-20% in India
-35% in Indonesia (largest)
-Largest in Vietnam and Sri Lanka

KEY OPPORTUNITIES

1. Importance of Scale and Influence for Commodity Players

More often than not, players in the commodity business are price takers and Wilmar is in such an environment. To survive and prosper in this industry one needs both to be a low cost player as well as scale.

And scale is what Wilmar has:
-One of the largest oil palm plantation owners with planted area of 238,287 hectares (over 3x the size of Singapore). Sime Darby Berhad is the largest player currently.
-Largest processor and merchandiser of palm and lauric oil with 143 plants (ex Associates) with total capacity of 36 million MT per year
-One of the largest oilseed and grains crusher in China with crushing capacity of 23 million, flour milling capacity of 6 mil and rice milling capacity of 2 million per annum
-Largest producer of consumer pack edible oils worldwide with 5.6 million MT in 2014 (44% market share in China, 20% market share in India and 35% market share in Indonesia)
-Largest supplier of edible oils in Africa

Beyond scale, another factor that stands out in the commodity business or for any business for that matter, are the stakeholders involved. And for Wilmar’s case, they have a stellar list of stakeholders behind as well as working with them.

Notable Shareholders:
-PPB Group Berhad: Deemed interested by Kuok Group Sdn Berhad
-Archer Daniels Midland: Says a lot when you have one of the ABCD as a substantial shareholder. Another positive indication was their increase in deemed interest from 16.4% to 18.1% in 2014.

Notable Partners:
-Kellogg Company: 50:50 joint venture company, Yihai Kerry Kellogg Foods (Shanghai) Company Ltd manufacture, sale and distribution of breakfast cereals and savoury snacks in China. It’s Kellogg!
-Clariant Limited: 50:50 joint venture for production and sales of amines and derivatives

 

2. Play On Consumer Growth

Due to its asset base, many might view Wilmar as a commodity company and we might not be mistaken to see it that way. However, management also sees Wilmar as a consumer product player.

And this is done through its consumer product operations (some of their products are shown in the picture above). It is at this level where brand building might be one of the most effective (one of the best ways to differentiate your brand). Think Coca cola.

Management also believes that building up brands offer a higher value-added proposition than merely being a commodity company. This might have been why Wilmar acquired 50% of Goodman Fielder (50:50 with First Pacific Company Limited) which owns brands such as MeadowLea, Praise, White Wings, Wonder White and more.

Funfact: First Pacific owns a majority stake in another one of the big Southeast Asia CPO players – Indofood Agri Resources Limited.

And with consumer staple companies (think Nestle, Unilever and Procter & Gamble) garnering P/E ratios north of 20x through good times and bad times, with higher and higher retail prices year after year (pricing power), it’s no wonder that Wilmar is looking towards this area for growth.

 

3. Africa – The Next Frontier

You can just look into Wilmar’s FY2014 Annual Report to see how serious Wilmar is on their African ventures. With 6 full pages dedicated to their Africa operations, it’s clear that Africa is their next frontier. And that’s not counting their Cover Page of their Annual Report titled “Wilmar in Africa”!

This doesn’t seem like a recent foray or fad and might have gain traction in 2007 (Wilmar was actually in  Africa since the early 2000s) through a JV with Olam International Ltd and SIFCA Group to develop businesses in palm oil, natural rubber, sugar and other agricultural plantation crops in Africa. Out of the key listed Asian oil palm players, only Wilmar and a few others (Sime Darby Berhad and Golden Agri,-Resource) have upstream operations in Africa.

So why have they gone into Africa? One reason is that Wilmar sees their strength in going into developing countries off the growing consumer trend. If you think about it, Africa is really the next frontier, you could possibly argue that they are the continent with the most to grow. Africa has been the world’s second fastest growing economy over the past 20 years (averaging 4.5%) and GDP is expected to grow at an average of 6% per year for the next 10 years! And to Wilmar’s credit, they do have the experience from operating in challenging areas from Southeast Asia to China and India. Today Wilmar is a key player in all 4 of these markets – close to 3 billion people right there!

Although as a continent, Africa might not have the best business infrastructure now, with their past operational success in the above 4 markets, you might not want to bet against Wilmar pulling this off. To date (FY2014), Wilmar has invested about US$800 million in Africa and there are definite intentions to carry on this path in the near future. Just look at their current operations in Africa:

KEY RISKS

1. Not Easy To Value The Business

As mentioned, Wilmar is not just a CPO player but rather an Agri-business giant. If Wilmar was simply a pure play in the CPO, we would only require to concentrate on one industry the CPO industry. That might still be rather manageable. But remember, even at a minimum (excluding consumer products), you could say that Wilmar has at least 3 different types of commodity linked operations:

-Palm Oil
-Sugar
-Oilseeds and grains (if we count them as one!)

With each commodity having a story of its own, I think that it would take some time for many of us to be able to appreciate the value of Wilmar’s business! Coupled with the recent ‘attacks’ by short sellers on Wilmar’s peers of Noble and Olam, the common theme among them appeared to be the wide divergence when it comes to valuation due to the trading nature of its operations. And this is where we think that Wilmar is different from the 2 (maybe this was why Wilmar is the only one of the three that has not been under attack by major short sellers). If I am not mistaken (and I might be!), Noble and Olam have a sizable portion of their operations of a trading nature and because of this, there might be a ‘black box’ type of thinking when many people look at their operations.

For Wilmar’s case, being fully integrated from upstream to downstream in palm oil and sugar gives investors a higher degree of comfort when it comes to assessing their operations. Although you still have to make some assumptions, such operations might be easier to appreciate when compared to businesses of a trading nature.

To help us out, an indication of how management views its value would be from Share buybacks. And a quick check of recent announcements showed that Wilmar’s management had been actively in the market for its own shares since Aug 2015 when prices went south of S$3 per share. This was not the first time management bought back shares in recent years. Back in late 2014 when the share price went close to S$3, Wilmar too initiated share buybacks from the open market. So this price level may be an indication that management feels that the market is underappreciating the value of the company!

 

2. Long Gestation Projects

Wilmar has a long term view on their business and this was implied in Chairman Kuok’s statement in their 2014 Annual Report where they see Africa as a long term play and “believes that African economic growth will continue in the next decade and our investments there will make significant returns in future”. Shareholders with a shorter investment horizon might not want to wait that long!

During Wilmar’s AGM, it was also heard that they are still in expansion mode and are likely to spend at least US$1 billion per year on new investments over the next few years. So this may also put off some shareholders that might be looking towards an increase in dividends!

And here are some of the big ticket expansions Wilmar had in the past few years:
2015: Goodman Fielder (50:50 with First Pacific Company Limited) – $1.3 billion for 100% stake
2014: Shree Renuka Sugars Limited – $88 mil for 27.72% stake
2013: Cosumar S.A – $263 million for 27.5% stake
2010: Sucrogen Limited – $1.5 billion for entire company
2007: Merger with Kuok Group’s businesses – Deal worth $2.7 billion

In the light of the current weak commodity pricing environment coupled with Wilmar’s expansion plans, one should not expect too much free cash flow to be generated. But in the event when commodity prices recover again, Wilmar (especially for those operations that they are involved in the upstream) might be well positioned to benefit from it. The eternal question where no one can be sure of is – When?

 

3. Commodity Business

No matter how one see it, Wilmar is still in the commodity business. And in the commodity business, unless you operate in either a monopolistic or duopoly market, it is highly likely that you are a price taker. But even so, if prices tank, everyone gets affected. And it would be an understatement to say that the past 2 years have been challenging. However a silver lining is that all of the 3 core commodities that Wilmar operates in (CPO, Oilseeds/Grains and Sugar) are soft commodities (perishable). Hence, compared to commodities like iron ore, rubber and coal which will not spoil/expire so soon, the extent of oversupply might not be so severe or as extensive (time-wise). Even so, it was mentioned in their FY2014 report that refining margins were compressed due to excess capacity in the industry.

One way Wilmar mitigates this is to diversify into commodities other than CPO (which they did) to provide them with a resilient cash flow. For example if CPO price falls, sugar might go up and things might net out. In a perfect world. But in the real world, everything can fall at the same time (CPO and Sugar prices have been falling since 2011). Upstream commodity-linked players will always be exposed to commodity prices swings. Likewise even though Wilmar may be a fully integrated CPO player and may be mitigated compared to a pure upstream player, they would still be affected by commodity prices.

In theory, an integrated player (upstream to downstream) is likely to have a more resilient stream of cash flows. Even in a challenging commodity environment (such as now), although upstream margins might be highly compressed, this will lead to the downstream businesses benefiting from lower costs. However on the flipside, if commodity prices go up, integrated players might have a lower margin compared to pure play upstream players. In essence, an integrated player engages in hedging of sorts. At the end of the day, as long as you think upstream linked players can cope with the risks, commodity price fluctuations are something you have to be able to live with.

On the other hand, if a tide lifts all commodity prices, Wilmar with significant upstream operations could reap huge rewards! On a separate note, the word diversification reminded me of a Dilbert Comic Strip (nothing to do with Wilmar here!) and it’s just to end this section on a light note.

SPECIAL MENTION

With the immense haze during this period especially severe (Sep 2015), it was an apt time to discuss how environmental and other groups have been targeting Palm Oil related operations. You might be surprised to know that Wilmar has been one of the leaders in promoting sustainability in Asia and this was driven by their No Deforestation, No Peat, No Exploitation Policy in 2013.

From being the target of NGOs in the past, Wilmar is now working hand in hand with them. Their 72 paged Sustainability Report 2013 can be found here!

LISTED PEERS

1. Golden Agri-Resources Limited
2. Indofood Agri Resources Limited

Due to the uniqueness and size of their operations, it is my opinion that Wilmar doesn’t really have an exact peer comparable.

INVESTOR RELATIONS

Investor Relation Material:
–Annual Report
–Investor Presentations

Email: ir@wilmar.com.sg

TOP SHAREHOLDERS (10 March 2015)

1. PPB Group Berhad: 18.34%
2. Citibank Nominees Singapore Pte Ltd: 8.92%
3. HSBC (Singapore) Nominees Pte Ltd: 7.00%

Single largest Direct Shareholder: PPB Group Bhd with 18.34%.
Kuok Brothers Sdn Bhd deemed interested in shares held by PPB Group Bhd.

Another notable Shareholder was Archer Daniels Midlands Company at 18.09%.

FINANCIALS

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities.

Mun Hong is not a shareholder in any of the above mentioned companies.

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