Wilmar International

[Choon]

Just to add a little on commodities companies processing their core products. During my course of work we do sell some machines to produce consumer products which these companies purchase.

Lets talk about palm oil producers, such as mewah, intercontinental oil & fats etc. (i know wilmar does not have a consumer production plant in malaysia but they have many labs with pilot consumer production machines to allow their end user to test the suitability of their palm oil but they do have plants for edible oil production), one of the consumer products is condensed / evaporated milk which uses quite a bit of palm oil & sugar (used to be tax free in malaysia).

The reason they want to venture to consumer products is because of higher margins instead of just selling palm oil (last few years CPO prices were at a record low). But with all consumer products there are alot of other cost such as marketing, provisions for product recall etc.

Wilmar's determination to move towards higher value-added products nearer to the consumer-end - as early as 2013.

"We believe that the future of our Palm & Laurics business lies in
higher value-added and higher-margin downstream products.
We are particularly pleased with the record US$855.7m pretax
profit achieved by our Palm & Laurics division in FY2013,
not because of the quantum of improvement (11% up from
FY2012 pretax profit), but more because of the structural shift
in the quality of the earnings, which were achieved in the face
of generally low palm prices and critically, through increased
contributions from high value-added downstream products."

[wj1984]

Just to add a little on commodities companies processing their core products. During my course of work we do sell some machines to produce consumer products which these companies purchase.

Lets talk about palm oil producers, such as mewah, intercontinental oil & fats etc. (i know wilmar does not have a consumer production plant in malaysia but they have many labs with pilot consumer production machines to allow their end user to test the suitability of their palm oil but they do have plants for edible oil production), one of the consumer products is condensed / evaporated milk which uses quite a bit of palm oil & sugar (used to be tax free in malaysia).

The reason they want to venture to consumer products is because of higher margins instead of just selling palm oil (last few years CPO prices were at a record low). But with all consumer products there are alot of other cost such as marketing, provisions for product recall etc.

Wilmar's determination to move towards higher value-added products nearer to the consumer-end - as early as 2013.

"We believe that the future of our Palm & Laurics business lies in
higher value-added and higher-margin downstream products.
We are particularly pleased with the record US$855.7m pretax
profit achieved by our Palm & Laurics division in FY2013,
not because of the quantum of improvement (11% up from
FY2012 pretax profit), but more because of the structural shift
in the quality of the earnings, which were achieved in the face
of generally low palm prices and critically, through increased
contributions from high value-added downstream products."

Yup! CPO prices fell from a high of 4k per ton in 2010 to as low as 1.8k per ton in 2014! But i have seen many of the CPO firms pivoting to downstream products and we can see increase competition over in that segment which is a good thing for consumers!

[donmihaihai]

Just to add a little on commodities companies processing their core products. During my course of work we do sell some machines to produce consumer products which these companies purchase.

Lets talk about palm oil producers, such as mewah, intercontinental oil & fats etc. (i know wilmar does not have a consumer production plant in malaysia but they have many labs with pilot consumer production machines to allow their end user to test the suitability of their palm oil but they do have plants for edible oil production), one of the consumer products is condensed / evaporated milk which uses quite a bit of palm oil & sugar (used to be tax free in malaysia).

The reason they want to venture to consumer products is because of higher margins instead of just selling palm oil (last few years CPO prices were at a record low). But with all consumer products there are alot of other cost such as marketing, provisions for product recall etc.

Wilmar's determination to move towards higher value-added products nearer to the consumer-end - as early as 2013.

"We believe that the future of our Palm & Laurics business lies in
higher value-added and higher-margin downstream products.
We are particularly pleased with the record US$855.7m pretax
profit achieved by our Palm & Laurics division in FY2013,
not because of the quantum of improvement (11% up from
FY2012 pretax profit), but more because of the structural shift
in the quality of the earnings, which were achieved in the face
of generally low palm prices and critically, through increased
contributions from high value-added downstream products."

Yup! CPO prices fell from a high of 4k per ton in 2010 to as low as 1.8k per ton in 2014! But i have seen many of the CPO firms pivoting to downstream products and we can see increase competition over in that segment which is a good thing for consumers!

Thumbs up. wj1984. 
It is the herd and not the sheep. Let hedge it by saying Wilmar is the best sheep out there.

[edragon]

It's debatable. Cannibalise your own market. Fight with your customers. Take one step forward and two steps back. Good?

[weijian]

It's debatable. Cannibalise your own market. Fight with your customers. Take one step forward and two steps back. Good?

It's indeed debatable. But I would say using commodities to sell brands is a better way to go. Kuok surely isn't contended doing 1 thing.

The last 5-7 years have shown us that customer habits change fast with disruption. And owning that relationship is paramount to having bargaining power.

[Choon]

Studied Wilmar for about a week. I especially admire the long-term thinking exhibited by the company and Kuok, investing and building a large business and hard assets, in a difficult business, over the past 20-30 years. In this aspect - the tenacity to build for long-term value and growth - perhaps Wilmar is the most (or one of the most) admirable and successful of SGX companies. I also thought that in this aspect, it resembles Amazon and Alibaba, having the capacity to endure and build up a large and integrated business over time.

My main concern is that it is operating in a difficult business. And that's where Wilmar's similarities with Amazon and Alibaba ends. 
1) Wilmar's business empire does not have the all-important self-reinforcing characteristic of Amazon and Alibaba. A new customer or new asset does not strengthen Wilmar as much as Amazon and Alibaba. As such, even as it expands, Wilmar cannot develop the high degree of monopolistic power and pricing power that Amazon and Alibaba as platforms possess.
2) For Amazon and Alibaba, the revenue from each new customer transaction would largely flow into profit. But Wilmar has a high variable cost (raw material COGS) to offset. Wilmar's return on capital would thus not be as high and profit growth not as fast as the tech giants. 

My second concern is that KKH is past 70. If only he is 50.

Wilmar's strategy:
1) Over the years, pursuing a long-term strategy of scale expansion, vertical integration, and growing its downstream business, Wilmar invested substantially in capacity expansion (in particular integrated manufacturing complexes) and new investments.

2) Volatility (trade tension, disease, weather, commodity prices, exchange rates, excess refining capacity) is the nature of agricommodity business.

3) To improve earnings quality and stability, Wilmar determined to grow its higher-margin downstream business.

Wilmar's earnings:
1) About half of Wilmar's subsidiaries profit comes from its Food Products segment.

2) Another ~40% comes from its Feed and Industrial Products segment.

3) Plantation and Sugar Milling contributes ~5%. The small profit contribution is due to the bulk of Plantation and Sugar Milling sales (~70%) being internal sales.

Wilmar's strengths:
1) large-scale and vertically-integrated (cultivation/origination, processing, merchandising, manufacturing, distribution) business and hard assets built up over 20-30 years provides synergies, resilience and logistical efficiencies;

2) presence in developing and emerging markets across Asia and Africa positions Wilmar to ride Asia and Africa's growth;

3) established consumer brands in many Asian and African countries;

4) leveraging its strengths in China, Wilmar is making a long-term bet on central kitchen, which management believes/hopes would become a core business.

Wilmar's weaknesses:
1) no/little pricing power selling to major food manufacturers (e.g. Unilever) - who can easily buy e.g. plam oil from another agricommodity trader;

2) no/little pricing power selling to end-consumers - staples like cooking oil, rice and noodles have less brand appeal than a chocolate bar;

3) swings in quarterly or yearly earnings - from little pricing power and volatility inherent in the agricommodity business;

4) net profit was relatively flat between 2012 and 2019, fluctuating between ~USD1B and ~USD1.3B - likely partly attributable to limited pricing power.

Valuation
At S$4.10, Wilmar is trading at about 12.5X 2020PE. Not very cheap. But I think reasonably cheap. The main risk I think is the business becoming increasingly difficult, that the energy and zeal of Wilmar's leadership becomes no longer sufficient to overcome such difficulty, and Wilmar then falls into stagnation, stasis and decline - like many SGX blue chips.  

(vested and considering to add)

[wj1984]

It's debatable. Cannibalise your own market. Fight with your customers. Take one step forward and two steps back. Good?

It's indeed debatable. But I would say using commodities to sell brands is a better way to go. Kuok surely isn't contended doing 1 thing.

The last 5-7 years have shown us that customer habits change fast with disruption. And owning that relationship is paramount to having bargaining power.

I'm not really sure on this but base on some of my on the ground interactions which malaysia producers (there are more such facilities up north than in SG due to sugar tax, labour etc)

Early consumer products manufacturers seems to have a stronger brand vs the new entries:-

Old timers
1. ETIKA
2. EONLIPIDS
3. ABLE
4. F&B
5. F&N

New entrants
1. MEWAH
2. WILMAR (i don't have biz dealings with wilmar)

[Choon]

Analysing Wilmar from another angle by comparing it with Kellogg's:

Wilmar and Kellogg's are similar in that they both manufacture and sell consumer-facing food brands (Arawana, Kellogg's).

Wilmar earned a PATMI of USD1.5B in FY2020 (vs Kellogg's USD1.3B). In terms of profit size, they are about the same.

But in terms of hard assets (property, plant and equipment), Wilmar’s PPE is USD12B (vs Kellogg's USD4B).

And in terms of operating profit margin, Yihai Kerry Arawana’s OPM is ~4% (vs Kellogg's ~12%).

Wilmar’s business is much more asset-heavy and lower-margin than Kellogg’s. In its current state, Wilmar’s earnings power and return on capital are significantly inferior to Kellogg’s.

The big question is are there qualities in Wilmar’s existing large business scale that would allow Wilmar to raise its asset utilisation and profit margins in the near future?

[BigFatWhale]

Riding the Commodities Boom- Wilmar

There has been recent talk about an inflationary spike and pressure on the overall economy. Commodities prices have been creeping up.

This phenomenon is not surprising given the huge money press at work and it is still running on full steam- Biden’s recent 2 trillion infrastructure bill was passed.The current US debt is at 28 trillion dollars.

We touched on the Fiat Money symptom in our article supporting Silver as a hedge against hyperinflation.

Looking at the charts, the commodities prices have been on a steady ascent since mid-2020.

Click Here to Read More:

https://thebigfatwhale.com/riding-the-co...om-wilmar/

[Choon]

Wimar Africa shuts down manuf plant in Ghana due to influx of imported cooking oil

https://business24.com.gh/2022/01/17/wil...oking-oil/

A good reminder of the risks of operating in less developed countries. Poor infrastructure causes high production cost which makes your products less competitive against imports as well as the more general risk of changes in regulations.

Vested.