Wednesday, 21 February 2018

Analysis on Wilmar

I realized that I've yet to seriously share a full post analysis on Wilmar on my blog yet. I've shared on numerous occasions that Wilmar is a company that I will like to build my positions on so long the price provides me with an attractive valuation.

Honestly speaking, as far as I'm into Wilmar, the price had all along provided me with the comfort to add onto Wilmar but sadly, I do not have to capability to consistently fire my bullets without any war chest.

Some might wonder.. Why Wilmar?
Wilmar doesn't gives attractive dividend, do they?
The answer is. No.
A big no especially to income investors where they look to receive tasty dividends from Wilmar.

Or maybe a better way to say so is, not at this moment.

Investors of Wilmar would have known that an analysis on Wilmar is not as easy as it seems due to the extensive broad range of service that they are providing. Further more, Wilmar is cyclical business which makes the whole equation look more draggy.


For cyclical business like Wilmar, indicators we are often seeing such as P/E ratio only provides us with the outlook of the current situation and not how it is exactly priced as compared to other periods, as their earnings are fluctuating to the cycles.

When cyclical stocks are in the thriving part, their earnings will soar, which will cause the P/E to look smaller. Having that said, the EPS will also be impacted in the cycle. Assuming that they are having a fixed dividend payout ratio, investors may see a sharp decrease in earnings along with the dividend when these cyclical counters are in their downturn period.

This will naturally cause a sell-down as investors will start to lock in their profit, which subsequently the price will be matched to it's earning.

So a better indicator to use to gauge on how is much Wilmar worth will be it's P/B ratio. In this case, we will have to take a look at their NAV.

During the upper cycle of a cyclical stock, it is normal to see them trading at multiple times their book value. For example, Wilmar in 2010.

Wilmar's FY2010 Financial Report - Page 17
Wilmar at the end of FY2010 (31/12/2010), Wilmar is trading at S$5.63.


Taking a quick look back at the USD rates on 31/12/2010, we have USD-SGD at 1.2813


This will mean that Wilmar is trading at USD 4.39 with respect to it's NAV at USD 1.85, representing a P/B ratio of 2.37.
Wilmar's FY2016 Financial Report - Page 13
Base on their latest AR2016, Wilmar's NAV stand at USD 2.28.


With the USD rate (31/12/16) at 1.44, we will derive with S$3.28 per share.
As the NAV is priced in USD, using the rate today we'll be looking at a different value.
Hence, it's always good to use the same date to compute it's NAV.

Yes, that is right. You did not see that wrongly.
Wilmar has grown and became a more valuable company despite the down cycle and it's book value had grown by 23% in this 8 years when the price is beaten down to $3 from $6.

The lowest point during GFC, Wilmar was traded for $1.95 on 24 Oct 2008.
Back then, Wilmar's NAV stand at USD 1.50 (SGD-USD = 1.47). With that, we will derive a P/B ratio of 0.88. Today's price of 3.08 over latest NAV of 3.28, this comes up to a P/B of 0.93, which isn’t too far off the value we’re buying into during GFC back then

And even at this price, it does represent a small bit of margin of safety.


The shiny thing here I like about Wilmar is the direction the company is heading to, to make Wilmar a more valuable company that it is by placing emphasis on Growth and consistently looking for ways to grow the company.

Wilmar had been rapidly expanding, venturing aboard, acquiring businesses and even carrying new products. Having done so, this will provides the company will a greater moat in the future as well as creating more sources of revenue for the company.

BUT! It's important to remember that when they're fueling such activities, CAPEX will be swelling and it will takes some time for the profit to be seen. When CAPEX eventually tapers down, this is when the company will have a greater FCF and investors could be looking at a greater dividend payout.

Hence, investors of Wilmar will have remember why they are in Wilmar. 

Looking at a P/B ratio of 2 in the upper cycle base on the NAV we see above, we will easily get $6.56 and a more conservative price of $4.92 for 1.5x book value based on the latest NAV ending 2016. But, this will only happen when the cycle goes back north.

I believe that even paying a fair price of 1.2x book value for a company with such impressive management is decent and this will comes to a price of 3.93. At today's price, it even provided me with a margin of safety! Delicious.

Even ADM (Archers Daniel Midland) was paying $3.37 a share in 2016! (Link below)

Buying a good business at fair price VS buying a fair business at good price?

However, being an extremely diversified business, losses incurred will easily wipe out profits, causing performance to be restricted. The other side to this coin is that, the performance will be more stable, and in the most favorable situation where more businesses are performing, you will be see the earnings rocket.

Yes, they're a major super-power in Palm Oil, but today, Wilmar is no longer just about Palm Oil, but many other businesses as well.

Some catalyst that we might be looking at in the coming days will be the upcoming listing onto Shanghai Stock Exchange in Mid-2019. (Link below)
I believe this event will create more funds for Wilmar to continue it's growth and expansion.

In conclusion: 
1. We have to know why we are investing in Wilmar - For it's growth and value
2. For that reason above, we will require patience
3. Some catalyst that will bring in some sparks will be the recovery of sector as CAPEX tapers off
4. Very diversified business provides us with a more stable performance but will also limits earnings due to losses incurred in other businesses, the most desirable outcome will be for the whole sector to thrive
5. We're putting our money with Wilmar for our dollars to grow, and not to rent out houses to collect rental. (Look at Berskhire which does not gives out dividend and reinvesting their dollars)
6. Despite the down cycle, Wilmar is creating value and is in the vision to create more by acquisition, expansion and venturing aboard.



Read: Wilmar's Technical Analysis

Wilmar's FY2017 result (ending 31/12/17) will be released tomorrow (22/02/18) after trading hours.
News on ADM's increase stake in Wilmar can be found here - Reuters
News on Wilmar's IPO in China can be found here - Nikkei  
Wilmar Annual Report 2006-2016 can be found here.