Is Wilmar International Still Worth a Buy?

Wilmar International (Ticker: F34.SI) is a SGD27 billion palm oil giant. This company needs little introduction. 

It’s also one of the world’s biggest makers of consumer cooking oil, sold to more than 150 countries globally.

In fact, their famous brand in China, Jin Long Yu or “Arawana”, is the top cooking oil in China for 16 years straight. 

And they’ve dominated China with a 45% market share.

From oil palm cultivation, to oilseed crushing and sugar milling…

…to selling consumer products like cooking oil, detergents, fertilizers, rice, flour, margarines to name a few. 

You see, Wilmar owns and runs the entire “agribusiness” value chain. 

What this means is they grow and process their own raw materials. 

Then, their factories put all these processed products into their own daily essentials brands — cooking oil, margarines, detergents, soaps to name a few. 

Their products have reached about five billion people worldwide. 

Today, Wilmar is the 10th largest listed company in Singapore. 

Making it a local “blue-chip” stock.

First, the Good News About Wilmar

Now their third quarter results brought some good news during this pandemic. 

Wilmar’s 3Q2020 sales rose 19% to US$13.3 billion, while its net earnings grew 20% to US$501 million. 

This was because the African Swine Fever situation has improved in China, and had led to a higher demand of its consumer products. 

Now, what’s more important is this. Wilmar recently IPO its subsidiary, Yihai Kerry Arawana in the Shenzhen ChiNext Board, a China stock exchange similar to the NASDAQ. 

Yihai Kerry Arawana is the wholesaler and distributor of Wilmar’s consumer food products in China. 

You see, many analysts on the street are raving about Yihai Kerry Arawana because of the huge valuation the subsidiary got from listing. 

And because Wilmar owns 89.99% of the subsidiary. 

This makes Wilmar supposedly more “valuable”. 

But, here’s the thing. The market is not really showing any huge share price gains.

Here’s a Dose of Wilmar’s Reality

Let me explain. 

You see, in the long run, the market knows how to reward fundamentally strong companies. 

And these companies often have this, which Wilmar sometimes lacks.

That’s business predictability. 

Wilmar is in the commodity business. 

In my opinion, it has to face periods of extreme cycles. Why? 

Because commodity prices, like gold prices, are fickle. It often moves up and down without warning.

That’s why Wilmar’s sales have never grown beyond US$50 billion. 

In fact, its sales have been stuck between US$30 billion to US$45 billion over the past 10 years. 

And because Wilmar has to invest heavily — build new factories, replace equipment, hire new staff —  even through poor market cycles, its net earnings get very volatile. 

Net earnings is what Wilmar gets to keep after paying for all its expenses — including salaries, raw materials, interest costs, taxes, expansion costs.

So, its net earnings have only ranged between US$970 million to US$1.6 billion over the past 10 years. 

This means its free cash flow also bounces up and down often — from negative US$3.3 billion to US$1.5 billion over the same period. 

As far as I’m concerned, Wilmar may not be the most capital efficient business. 

If you see, Wilmar’s return on invested capital (ROIC) is typically low single digits — around 3% to 5%. 

That’s also why its share price never exactly recovered after it crashed in 2010. Imagine you’d bought the stock at the peak back then. You’d probably get back slightly more than half of your invested capital, even if you held it till now.