“What keeps you awake at night, Mr. Kuok?”
That was one of the questions posed by an analyst to Mr. Kuok Koon Hong, CEO of Wilmar International Limited (SGX: F34), at their AGM last year in 2013. Apparently, Mr. Kuok sleeps peacefully at night because he knows his company across all divisions is doing well.
During that AGM, I also learnt that Mr. Kuok isn’t someone who puts a lot of emphasis on short-term results; he believes that to build a successful business, you must have a strong long-term vision of the future – which I believe has been fundamental to Wilmar’s phenomenal success today.
So this year in 2014, I attended Wilmar’s AGM again looking for important takeaways and information that might be crucial to my investment in Wilmar, and I wasn’t disappointed in the least bit! So here goes…
10 Quick Things I Learned from Wilmar’s AGM 2014:
- Ten years ago, Kuok was bullish on the Indonesian and Malaysian markets for oil palm cultivation, followed by China and India. Today, Wilmar is number one in all four markets. Now, Kuok believes the next biggest market is Africa. Wilmar’s management has shown good business foresight and acumen so far and if they can pull off the same level of success in Africa as they did with Indonesia, Malaysia, China and India, investors in Wilmar could see more explosive growth for the company down the road.
- Oil palm crop yields in Africa are relatively lower than in Asia. However, the price for palm oil is much higher in the continent. This offsets the lower yields and explains why Kuok is still bullish and pursuing the African market.
- Wilmar owns 34 liquid bulk and 9 dry bulk shipping vessels. With an immense refinery capacity of over 10 million tonnes, it makes more sense and gives more flexibility for Wilmar to wholly own ships than lease them from ship-owners. For example, Wilmar would send palm oil to India when rates there are better compared to other regions. But if rates in China or Indonesia improved, their ships would send the oil there accordingly. Furthermore, if the ships have a high utilization rate, Wilmar also makes decent profits from their shipping division. The combination of profits from both shipping and trading has been producing good margins for the company.
- As compared to the year before, Wilmar’s Consumer Products division’s profit before tax grew by 40% on sales growth of only 6.5%. On the other hand, the Palm Oil & Lauric division’s profit before tax dropped 27% despite its sales volume decreasing only marginally. The higher margin from consumer products, mainly cooking oil, will help offset the lower profit margin of the Palm & Lauric division. This sharp increase in profit margin is the long-term effect of Wilmar erecting its economic moat. By integrating the various components in the value chain that Wilmar has been building for the last few decades, the company has better control on costs and profit margins. If commodity prices increase, Wilmar’s business divisions sitting upstream on the value chain would profit the most. Should commodity prices decrease, Wilmar’s business divisions sitting mid and downstream, such as oleochemical, biodiesel and consumer products would benefit greatly from cheaper cost of production. Wilmar’s near-complete integration and domination of the value chain offers stability and a highly resilient business model.
- The volatility in Wilmar’s industry is unavoidable (e.g. fluctuation of palm oil and soybean prices). Despite that, Wilmar is still growing from strength to strength against its competitors. That reminds us we should not be overly affected by short-term fluctuations, but focus on the long-term strategic plan of the company.
- As high margins usually attract competition in the commodity sector, Kuok prefers to use one his core strategies of using large economies of scale to bring costs down to beat out the competition and dominate market share. It has been largely effective so far as Wilmar is currently the world’s largest processor and merchandiser of palm and lauric oils.
- Kuok will only initiate a share buyback if Wilmar’s stock price is depressed. If not, capital and financial resources are usually deployed for expansion purposes. According to my last check, the last share buyback was executed September 2012 with an average transacted price of S$3.00 – that gives you a good indication of the price range that Kuok might possibly initiate another share buyback. Should that buyback occur, it will reduce the number of outstanding shares in the market and increase the value of each share for existing shareholders.
- Wilmar’s increased gearing over the last five years was due to higher commodity prices. This increase in debt levels has been bugging many investors, including me. However, Kuok isn’t worried about the level of debt as most of it was used to purchase commodities in the form of trade financing which constitutes 63% of Wilmar’s total loans. As I discovered, trade financing is simply a tool used to minimize credit risks between importers and exporters. The loans are relatively low and short-term, and it is the norm among commodity companies.
- Wilmar is refinancing its floating-rate loans (which have been enjoying low interest rates for the past few years) into fixed-rate loans in preparation for rising interest rates. Similar to the move done by BreadTalk in my earlier article, this will help to stabilize their interest payments and allow the company to better predict and budget their expenses down the road.
- Kuok doesn’t plan to spin off any of Wilmar’s existing business divisions for an IPO. The benefit of an IPO and listing an individual business division as a separate company on the stock exchange is that it greatly increases the overall value of the new company. But in doing so, the separate companies would require arms-length transactions with each other and incur higher overhead costs, something that Kuok feels is not worth doing. Kuok wants to focus on building up Wilmar as a whole rather than deal with corporate restructurings. If Kuok staunchly believes in his own entrepreneurial instincts rather than listen to analysts’ expectations and with his track record, this the kind of CEO I would comfortably entrust my money with.
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