Wilmar — A commodity powerhouse
As the top commodity company by market cap that is listed on the Singapore Exchange, Wilmar definitely hold its own as a commodity player. It is one of the largest agribusiness in the region with plants all around the world. Beyond size and scale, there are some fundamental reason for Wilmar to be a stock to have in one’s portfolio.
- Good record of profitability and growth
Below is a summary of the company’s CAGR of key metrics from FY2015 to FY2019, extracted from its FY2015 annual report.
Top-line revenue has grown at a CAGR of 2.4% over the past 5 years to reach USD43 billion. The CAGR of EBITDA, PBT and bottom-line net profit has exceeded that of top-line revenue, indicating a strong cost efficiency attached the growth in the business. This is further evidenced from the CAGR of the various margins indicated above. Such a business performance is even more remarkable given that the price of palm oil, which account for about half of Wilmar’s business, has been on a steady decline over the period as shown below. The growth in volume has more than made up for the decrease in price.
From an investor’s perspective, the growth in EPS has been volatile but on an CAGR basis, still quite solid. The same could also be said of the company’s ROE figures. Dividends has been steadily increasing since FY2016, with FY2019’s dividend the highest recorded by the company since its listing on SGX. The payout ratio has also mirrored the growth of dividends, indicating that there is a solid business basis for dividend payouts.
From a going-concern basis, while the growth in total liabilities may be concerning, the reduction in net gearing lend some cause for comfort. A commodity business naturally involves a significant amount of leverage due to its high capital-intensity, especially in expansion plans. This is an area to keep a close watch on going forward but as of now, it looks fine.
The strong growth in operating cash flow also provide strong fundamentals for the business. This is especially in Wilmar’s line of business where a lot of trade financing and receivables are extended to its suppliers and customers. It is imperative for such a business to ensure a healthy cash flow from operations.
2. Good business model
While Wilmar is certainly a behemoth of a corporation in its own right, its business model is quite straight-forward with many synergies. There is also evidence of a cohesive strategy in business expansion, which probably provides the company with solid fundamentals.
Wilmar derives half of its profit from the tropical oil business, which is the entire supply chain of palm oil plantation, refining, manufacturing and distribution. It has also expanded into oilseeds business that account for 38% of its profit. The oilseed business represent a good synergy with palm oil as they involve a lot of similar processes, plants, temperature requirements and many more. Even its expansion into sugar and fertilisers represent the same ecosystem of basic crops and commodities that the company is in the market for. Shipping business will also help in enhancing logistical efficiency in the distribution of its products.
Given the basic nature of this commodity, the structural demand will remain strong. Along with common supply disruptions, there will be impetus for higher palm oil prices.
One of the biggest risk that commodity producers like Wilmar will face is the increasing focus on ESG from all stakeholder. Global FMCG companies like Nestle, P&G that are customers of Wilmar are under the same pressure to ensure their suppliers are ESG-compliant. Investors and even banks are also watching companies’ ESG policies and implementation closely. This is especially true for a company like Wilmar whose business has a direct and much visible impact on the environment. It is thus comforting to see from its FY2019 annual report the preponderant attention given to the company’s adherence to best ESG practices.
From a governance perspective, the Kuok family still retain significant ownership and control over the business, given that the Chairman is also a Kuok. Therein lies all the risks associated with family businesses, but also many of its advantages. The key is to ensure the company mitigate the risks and leverage on the advantages. This is certainly one aspect to watch.
In terms of board diversity, Wilmar certainly has room for improvement. It can do more to incorporate more diversity in its board vis-a-vis age, gender, ethnic and nationality. A summary of the board breakdown is presented below.
3. Stock price
In terms of stock valuation, the stock price is nearing its all-time high as shown below given the broader market rotation into cyclical stocks like Wilmar. As an investor, it would be good to moderate the pace of buying into this stock for now. Alternatively, one can wait for market corrections before entering. Nevertheless, this is definitely a stock to hold in one’s portfolio.
