Wilmar International

[Choon]

Which means the D that goes into calculation of D/E should only be debt incurred for CAPEX and M&A and investments and share buybacks.

Hi Choon,
What you have described is just working capital requirement. Part of Wilmar's business is acting as a broker and brokers have high working capital needs. Since this is their business model, why should it be excluded? 

Why should debt that is used for part of their business model be excluded? If a serial acquirer uses debt for MA and MA is part of their business model, is it justified to exclude debt from the D/E calculations?

Of course, everyone has their "own" calculations. If not, the market will be terribly efficient!

How many legs does a dog have if you call his tail a leg? The answer: Four, because calling a tail a leg doesn’t make it a leg, even when auditors/ authorities/ journalists/ Mgt are willing to certify and vouch it is one.

That said. It is my personal opinion that their debt isn't a big problem. It is simply part of their business model. They need to have high debt to generate sufficient returns and this speaks about the merits of the business itself. But the Kuoks are old hands in this business - because they hold hard assets and vertically integrated, they have a better chance to survive than let's say a pure commodity broker in the downturn. Debt can't be ignored but it can be endured.

Hi Weijian,

I think it is precisely the working capital employed in the broking business that Wilmar is excluding from their adjusted net debt calculation. 

Why? Because that inventory, given the nature of commodities (homogenous) and the mechanics of the commodity business (near-term contract fulfilment, hedging employed), is about as reliable and liquid as cash.

Say an acquirer borrow $100M to buy a $100M machine / company. 

1) Timing - But that acquirer will have to hold that machine / company for years to enjoy its use, or at least one year before the acquirer can sell it away. So there is a timing risk. Whereas Wilmar may buy sugar this week and sell next month/week under its broking business. Only 1 month/week of risk before the inventory is converted to cash again.

2) Certainty of closing - There is no ready market for such a machine / company. Whereas sugar is a homogenous product that can be sold off to any user, a machine /company has so many unique specifications to it. So even if the other original side reneges on its contract to buy sugar from Wilmar, Wilmar can enter the general market and look for other buyers at the prevailing mkt price.

3) Value of inventory is locked in - Wilmar can enter into hedges to lock in the effective price of sugar on its balance sheet. So even if it has to sell to other buyers at the prevailing mkt price which may be lower than the original contractual price with the original buyer, any loss it suffers from the sale is compensated by the gain in sugar futures.

My interpretation is that it is these 3 characteristics of the commodity business that make the inventory almost like cash.

And it is because of these 3 characteristics that lenders are willing to lend so much (80%/90%) to finance commodity trading - not because KKH / Wilmar has a good track record.

[Choon]

Wilmar's ROE is low, fluctuating between 8-10% in 2017-2021.

Does this represent that Wilmar is not an attractive business with strong earnings power despite its vertically-integrated business model (from farm to factory to consumer)?

Or is ROE not an adequate theory/framework to evaluate the business performance/quality of Wilmar?

Thoughts and insights please. Thank you.

Vested

Hi Choon,
From AR21, I see that Wilmar has ~26bil net debt (total debt minus the cash) with 22.6bil equity (including minority interests for simplicity sake).

With PATMI=2.07bil:
- ROE ~ 9.1%.
- But if we account for the debt, ROIC ~ 4.3% (2.07/(22.6+26))

Since we are talking about earnings power, which itself is a generic description used across industries. I believe ROIC would be a better gauge than ROE, since it accounts for the capital structure (ie. owner equity and debt)

So rather than referring to "high single digit to low double digit" returns, first we should actually use the figure of "mid single digit" as the basis for discussion/thoughts.

I believe this ballpark number may answer some of your questions.

My 2 cents:

(1) We can safely say that most family businesses are more concerned about extending their dynasties over generations, rather than optimizing for profits to get their annual bonuses. This effort can be through improving resilience of the business (positive for OPMI) OR simply trying to exerting more control by buying out depressed OPMIs at low prices (bad for OPMI).

(2) Many commodity players are at the mercy of prices and those who control the distribution (the brokers). The brokers themselves have huge liquidity risks (Noble as the easy one to raise as the poster child victim). And finally FMCG companies themselves are at the mercy of input costs increases (this threat has never been higher in the current immediate future). By been fully vertically integrated from farm to consumer, they give up the obscene profits of a boom to protect on the downside. And downside is the most important factor for dynastic rule, not obscene profits. So I see the Kuok Clan doing a lot of things to improve resilience of their business.

(3) Rather than looking at earnings power from a quantitative viewpoint, we should also look at the qualitative aspects. For example, I would love to see how sticky Wilmar is to its customers to determine whether it has a moat or not. Then connect the dots between quantitative (profit margins, ROE/ROIC) and qualitative (moats) and see if they are telling the same story. If they are not, then probably our work/thinking on at least 1 of the 2 aspects is wrong.

Perhaps one qualitative moat is that Wilmar has a dominant market share. Supplies 70% of sugar in Australia, largest soy bean crusher in China, largest palm oil processor in the world. But is large market share of a non-differentiated commodity product really an important strength???

One quantitative reason for the low ROE is that Wilmar invests a lot in CAPEX. Wilmar's capex on PPE is about USD2B per year relative to depreciation of about USD1B per year and PATMI of about USD2B per year. 

So perhaps given the pace of capex investment, it takes gestation time for utilisation / production efficiency to catch up. 

The big qn then is will that day (end of gestation) ever come? Given that KKH is not exactly young too.

[Choon]

Wilmar's AGM this Thur.

One often hears that farmers are bullied/ oppressed.

But Wilmar even though its a large middleman in the agri-commodity value chain is not earning an attractive / impressive ROE too (just 8-10%).

1) So who exactly are milking profits on the food industry value chain?

2) Or no one is?

3) Or Wilmar is, just that its always in expansion mode (annual capex >$2B) and thus returns are always masked by high capex?

[Choon]

From Wilmar's AGM minutes:

Q19) Wilmar’s share price is underperforming, will the Company consider a secondary listing on another stock exchange?

A19) We are considering various options to help unlock the potential of our share price.

Tapping the brains of valuebuddies here. Are there many options? What can there be other than the usual of: (a) share buyback, (b) higher dividend, and © selling more shares of its listed China subsidiary (Yihai Kerry Arawana)?

How would the mechanics of © work? Yihai Kerry Arawana is already listed. Can Wilmar just go into the market to sell more shares of YKA to the public?

[touzi]

https://www.straitstimes.com/business/ad...ar-sources

Is there a possibility that Wilmar will buy over part of Adani's stake?

[Choon]

https://www.straitstimes.com/business/ad...ar-sources

Is there a possibility that Wilmar will buy over part of Adani's stake?

I guess the more important question is whether Wilmar buying over Adani's stake is good for Wilmar's shareholders?

Adani Wilmar is a listed entity. Not sure whether Wilmar has a first right over any proposed transfer of shares by Adani.

There is a statement in the news article - that there are regulations requiring large firms to have a float of >=25% within 5 years of listing. 

Adani selling to 3rd parties would help to satisfy above stated requirement.

[Choon]

Attended Wilmar AGM a while ago and submitted questions before-hand. The online-AGM portal is not user/shareholder friendly as it sets a character-count on questions. Submitted my questions to Wilmar's IR directly. Thankful and glad that they addressed my questions. Wilmar's responses to earlier-submitted and on-the-spot questions were pretty direct and informative, definitely not dismissive or riddled with meaningless corporate jargon.

I feel that this system for submitting questions before-hand is a most useful system for retail shareholders. And hopefully it will bring about thoughtful and constructive questions that encourage management to share insights of their business. It was disappointing however to see that my 10 questions accounted for 10/12 of the total 12 questions.

Spent significant time trying to crystallise the investment thesis for Wilmar. In three lines, this is how I currently sees Wilmar:
1) Wilmar has growth potential.
2) But historical earnings show that it is difficult to confidently assess if earnings would be materially higher in the medium-to-long-term given the high-earnings volatility inherent in agri-commodity trading and processing. 
  Wilmar.pdf (Size: 174.22 KB / Downloads: 18)
3) Given that earnings are volatile, Wilmar should ideally be bought at a valuation based on “trough-earnings”, to avoid overpaying based on “peak-earnings” or “average-earnings”.