You can find my last article on Wilmar here.
In less than two years, oil price crashed 76%. That was 2014. No one expected this would happened. But it did.
This sudden drop in oil prices wiped out Singapore’s oil & gas companies.
And forced our Singapore banks to write off their loans to these companies.
The thing is, no one can ever predict where commodity prices are going. Whether it’s oil prices or interest rates.
And here’s the thing, a business that has to rely on commodity price movement to make money is a risky business.
Because you don’t know exactly where commodity prices will go the next day.
Wilmar is exactly the business controlled by commodity prices.
My subscriber asked: “Hi Willie, any thoughts on Wilmar? It’s at $4.16 now, 1 year lowest already.”
What You Might Want to Know About Wilmar
In good years, commodity prices go up. You get to sell your stuff at higher prices. And make higher profit margins.
That’s what’s going on with Wilmar right now. In its recent half-year results, Wilmar produced S$29 billion in revenues, up 30% from a year earlier. Its net profits grew 15% to S$732 million.
Wilmar’s strong growth in its tropical oil, oilseeds, grains and sugar business looked as if the business is unstoppable.
Now, these products are what Wilmar processes and sell as industrial products. It’s a large part of the business that depends on raw material costs. If Wilmar sells for more than what it produces, it makes a profit.
But what happens if Wilmar was forced to sell products at a price lower than their raw material costs?
In 2019, Wilmar suffered a revenue drop, earnings drop because of the African swine fever that caused a huge drop in their profit margins. And during that year, commodity prices fell, that also led to lower revenue for Wilmar.
Like oil prices, Wilmar is at the mercy of a volatile commodity market. One moment, you can make huge profit margins. But the next, you could be suffering low margins and low volume. There’s nothing to stop this from happening.
Wilmar has no economic moat. There’s no strong branding or any intellectual property to protect its earnings.
And that’s also why Wilmar has long suffered from a series of thin profit margins. Even though Wilmar generates between S$44 billion to S$50 billion of revenues over the past 10 years, it makes on average only 3% net margin on its revenues.
That’s ‘peanuts’ profit margins.
Over that same past 10 years, Wilmar put in a total S$13.2 billion of capital expenses to grow its business. But it yielded only a total S$2.4 billion of free cash flow.
Source: Dividend Titan
This doesn’t look like a capital-efficient business at all.
Buying Wilmar is like guessing the weather. Is it going to rain or shine tomorrow? You’ve absolutely no idea how commodity prices will affect its business. You’ve absolutely no idea whether Wilmar can grow sustainably over the next five or even 10 years.
It’s hard to invest in such businesses.
But Here’s What I Like About Wilmar
Of course, the bright side of this business is Wilmar pays a steady dividends.
Since 2011, it rewarded shareholders with a healthy dose of dividends. It grew dividends from S$0.04 per share to US$0.20 per share in 2020. It recently proposed a half-year dividend of S$0.05 per share. This is the highest interim dividend since its IPO.
I know Wilmar sells daily essentials too. But don’t forget, half of its business relies heavily on raw material prices. As long term investors, you want to think about the predictability and growth of the business in its industry.
Bad cycles can throw even the best businesses off track.
What I usually like to do is pay attention to businesses that have sales, earnings and cash flow grow year after year. It makes their dividends more sustainable this year. And I get to sleep better at night. If you ask me whether Wilmar is a buy now, I think it depends.
Wilmar is not a company that will go bust overnight. But its shares are affected by commodity prices. That’s why Wilmar shares bounces up and down more often than any other stocks out there.
If you’re okay with its volatile share price and a 3% dividend yield, it’s a reasonable business. An average business at best.
Know this: past performance does not indicate future performance, but it does tell u the nature of its cash flow, how risky the business and reveals insights to how sustainable its dividends are.
Sometimes investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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