“Should I Buy Wilmar Now at $4.16?”

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.