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News & Analysis Singapore

Wilmar, To Buy Or Not To Buy

April 2, 2014, Wednesday, 17:34 GMT | 12:34 EST | 21:04 IST | 23:34 SGT
Contributed by Shares Investment


Some stocks depend on the economy, and for some stocks, the weather is a critical catalyst.

Wilmar International (Wilmar), a leading agribusiness group, founded by Robert Kuok, is also one of the component stocks that makes up the Straits Times Index (STI).

This behemoth is known for its soft commodity segments such as palm and lauric oil, oilseeds and sugar.

Consumable products that eventually become packaged end products are things like its packaged cane sugar, Aaawana brand’s cooking oil, flour and rice products.


Stock Run Up

Its stock price has seen a good run up since February this year, largely due to positivity garnered from its investment in Shree Renuka Sugar (SRS).

Also, its decent set of FY13 results, which showed some nine percent increase in earnings, compared to FY12, also lifted expectations from market watchers for its performance in FY14.

Earnings per share, as a result, rose from FY12’s 23.95 cents, to 26.06 cents.

Let’s zoom into the investment risks and merits of this giant.


Investment Merits

- Largely integrated business with strong value chains, allowing it to operate with huge economies of scale advantage

- Stable Return on Equity of close to 9 percent

- Strong operational cash flow depicting solid ability to maintain and grow its operations

- Investment in SRS will enable Wilmar to extrapolate its sugar presence in India and Brazil

- Positive outlook on China’s consumption for its consumable products such as cooking palm oil, rice, and flour, expected to drive sales volume


Investment Risks

- Weather conditions can affect and depress average selling prices of most of its product segments

- Depressed crude palm oil (CPO) prices will have adverse effect on Wilmar’s performance, as more than 45 percent of Group’s revenue comes from the Palm oil and Laurics segment.

- Policy changes as a result of inflationary pressure in China could hurt pricing and demand of Wilmar’s consumable products

- High leveraged position (net debt to equity: 0.931) places strain on servicing finance costs

- Rise in short term interest rates could increase finance costs pressure on its eventual margins

 
SI Research Takeaway

It is hard not to be impressed by the competitive advantages derived from this giant’s strong value chain and economies of scale.

Personally, the investment in SRS is one that has laid good moats on the value floor for Wilmar.

Not only will it enable Wilmar to boost its refining and milling capacity, the additional sugar presence in India and Brazil will possibly translate to an even bigger customer base that can translate to higher sales volumes and revenues.

The dry weather that can alter CPO prices (down or up) will continue to be a double edged sword.

Whilst Wilmar produces Palm oil and Laurics, which technically should benefit from higher average selling prices, it also buys and imports them, which will translate to higher purchase costs.

This concept applies in the event of depressed CPO prices as well.

Nonetheless, identified moats have established strong pillars that will hold the group and move it forward.

Management’s guidance of 2014’s outlook has been largely positive, and it will be interesting to see if management’s guidance can be met after all.