Bloomberg News

Wilmar Takeovers Looming After Stock’s Decline: Real M&A

August 27, 2012

Wilmar Deals Loom With Stock at 65% Discount to Sales

Kuok Khoon Hong, chairman and chief executive officer of Wilmar International Ltd. Photographer: Munshi Ahmed /Bloomberg

Wilmar International Ltd. (WIL) needs an acquisition to reduce its dependence on a money-losing, oilseed- crushing business in China as the company trades at a 65 percent discount to sales.

Profit at the largest importer of soybeans into China fell 52 percent in the first half of the year as the unit that turns the beans into oil and animal feed reported a loss. The most severe U.S. drought in half a century now threatens the business further by driving up soybean prices. Down 36 percent this year, the Singapore-based company’s stock is the worst performer in the city-state’s benchmark index and is trading at its lowest price-to-sales multiple since 2008, according to data compiled by Bloomberg.

After it attempted to buy Goodman Fielder Ltd. (GFF) and considered a bid for Gavilon Group LLC this year, Wilmar could reverse its stock decline by acquiring a company that lessens its reliance on China, according to PhillipCapital. Australia’s GrainCorp Ltd. (GNC) would give Wilmar a business in food commodity trading, said Emerald Group Australia Pty, while purchasing Brazilian sugar operations would give it a foothold in the largest sugar-producing country, said Nomura Holdings Inc.

“They should be making acquisitions,” James Koh, a Singapore-based analyst at Maybank Kim Eng Holdings, said in a telephone interview. “It’s better for them to diversify their portfolio in terms of their product offering. Any sort of diversification should be good for them.”

Crushing Soybeans

“We will only consider M&A opportunities which have synergies with our existing operations,” the company wrote in an e-mailed statement. Wilmar has a capital expenditure target of under $1 billion for this year, “unless we see very compelling targets for M&A,” Chief Executive Officer Kuok Khoon Hong said at an Aug. 15 briefing.

Kuok is the nephew of Malaysian billionaire Robert Kuok, who controls about 28 percent of Wilmar, data compiled by Bloomberg show. Decatur, Illinois-based Archer Daniels Midland Co. also holds a 5.2 percent stake in Wilmar, the data show.

After starting in 1991 with an oil palm plantation in Western Sumatra, Indonesia, Wilmar has grown to become the world’s largest producer of the oil used for cooking and in soap and biofuel. Kuok built Wilmar through a series of acquisitions that have totaled $5.9 billion in the past decade alone, data compiled by Bloomberg show.

The company is now the largest importer of soybeans into China, it says. The country was home to 50 of the 54 plants, owned by Wilmar and its subsidiaries, used to crush soybeans and other so-called oilseeds into meal used in animal food and cooking oil, according to the company’s 2011 annual report.

Decade-Low Margins

Yet, Wilmar’s oilseeds and grains division swung to a $92.5 million loss in the first half of 2012, from a $321.5 million profit the year before, data from the company shows. Crushing margins in the second quarter were the worst in a decade, CEO Kuok said earlier this month.

The business began suffering after government-backed companies in China added more oil-crushing capacity than the country needs, an excess that will take several years to disappear, Macquarie Group Ltd. analysts wrote in a report dated Aug. 21.

Since 2006, Wilmar’s sales in China have risen more than fivefold, to about $21.7 billion last year, according to data compiled by Bloomberg. The country, where Wilmar produces packaged cooking oil and mills rice and flour, accounts for almost half of its $44.7 billion in annual revenue.

Diversifying Acquisitions

“Given their focus is on China, it would be better for them to diversify to other regions, other emerging markets,” said Nicholas Ong, an analyst at PhillipCapital in Singapore. “Acquisitions will definitely help, being a catalyst to their stock price.”

Wilmar faces pressure not to raise prices in China even as the cost of soybeans surges amid the worst U.S. drought since 1956. After telling cooking oil suppliers to keep wholesale prices for packaged products stable to avoid stoking inflation in July, Chinese government officials also asked suppliers to start reporting product prices, people with knowledge of the matter said earlier this month.

As soybeans traded in Chicago have jumped 45 percent this year, soybean oil traded in Dalian is up only about 11 percent, data compiled by Bloomberg show.

Wilmar’s 36.4 percent decline this year is the steepest drop among the 30 companies in Singapore’s benchmark Straits Times Index (FSSTI), which has gained 15 percent. Wilmar ended trading last week at S$3.18 a share, giving it a market value of S$20.4 billion ($16.3 billion). Wilmar was unchanged in Singapore trading today.

Sales Discount

The stock was valued on Aug. 24 at 0.35 times sales, a level not seen since December 2008, data compiled by Bloomberg show. That compares with an average multiple of 1.7 times for 47 food manufacturers and agricultural product wholesalers with a market value higher than $5 billion, the data show.

An acquisition that adds new product lines to Wilmar’s portfolio would help offset the risk of a downturn in a single industry, said Maybank’s Koh.

“If you look at their product range it’s actually quite narrow,” he said. That “might result in more earnings risk if one or two markets don’t do that well. Anything that can leverage on their existing expertise in agricultural products should be decent places to go into.”

Among targets that would suit Wilmar is Sydney-based GrainCorp, operator of seven of the eight ports that ship grain from Australia’s east coast, according to Mike Chaseling, deputy chairman of Melbourne-based grain trader Emerald Group Australia. GrainCorp, with a market value of $2 billion, owns silos, railroad cars and grain elevators used to load ships.

Targeting GrainCorp

“GrainCorp would seem to broadly fit a Wilmar that’s involved in trading and accumulating bulk commodities and involved in first-stage processing,” Chaseling said in a phone interview. “There are not that many assets left if you want to have a meaningful position in the Australian grain supply chain.”

Angus Trigg, a Sydney-based spokesman for GrainCorp, declined to comment on market speculation. GrainCorp, which rose as much as 1.9 percent today, was up 0.2 percent to A$9.85 by the close of trading in Sydney.

Another approach for Wilmar would be to build its business outside of Asia, said Tanuj Shori, an analyst at Nomura in Hong Kong. Asia, including Australia and New Zealand, accounts for 79 percent of Wilmar’s revenue, its annual report shows.

“They should go and acquire sugar assets in South America,” Shori said in a phone interview. “South America is a hub of export markets when it comes to food. If you want to be a global trader, you have to be in South America.”

Brazilian Sugar

Wilmar, which already owns an Australian sugar mill, has yet to follow rivals into Brazil, the world´s largest producer and exporter of sugar. Sugar mills in Brazil are struggling with debt, which paved the way for acquisitions by Olam International Ltd. (OLAM), Noble Group Ltd. and Louis Dreyfus Holding BV in past years. According to the Unica industry association, about 41 cash-strapped mills have shut down since 2008.

Adding to its palm-oil business with purchases of plantations in Africa would also help, said Ong at PhillipCapital. The unit that grows oil palm in Malaysia and Indonesia generated the highest profit before tax of all the company’s divisions, yet only accounts for 5 percent of assets, according to Ong.

“Plantations would definitely be a good investment,” he said. “They actually fetch a higher return on the asset.”

Africa Investment

Wilmar has increased investment in Africa, buying 77 percent of Ghana-listed Benso Oil Palm Plantation Ltd. (BOPP), stakes in oilseed crushing plants in South Africa, and building a palm oil refinery in Nigeria last year, according to its annual report. Still, with only 2 percent of Wilmar’s total planted oil-palm plantations in Africa, the company will look for more ways to expand its land on the continent, it said.

Rival Olam in July said it signed a loan agreement for $228 million to finance palm-oil production in Gabon, while Ethiopia’s government said in April it had identified almost 1 million hectares (2.5 million acres) of land suitable for investors in biofuel crops such as oil palm.

Any acquisition would add to Wilmar’s already rising debt even as earnings decline. As Wilmar’s net debt increased to $12.5 billion by the end of June, its interest cover -- a measure of ability to meet interest payments -- slipped to 5.7 times from 9.2 at the end of 2011.

“Wilmar is already quite leveraged, so you’d have to balance any acquisition with the fact that they’d probably have to take on more debt, and that would add more concern,” Vincent Fernando, an analyst at Religare Capital Markets in Singapore, said in a phone interview. “You don’t want to be adding debt while your income is slowing.”

Failed Deals

This hasn’t stopped Wilmar from considering deals recently. The company explored an offer for Omaha, Nebraska-based Gavilon before Tokyo-based Marubeni Corp. (8002) struck a $3.6 billion deal to acquire the grain merchandiser in May, people with knowledge of the matter had said in March.

Wilmar said this month that it also made a takeover approach to Goodman Fielder earlier this year. Wilmar didn’t reveal how much it was willing to pay, and Goodman Fielder, a seller of dairy products with a market value of about $1 billion, said it never received a formal offer.

As Wilmar remains profitable even with the losses at its oilseed crushing unit mounting, the company will always be on the hunt for acquisition opportunities, said Ong at PhillipCapital.

“Companies need M&A in this industry to grow,” Nomura’s Shori said. “Move out of Asia, that’s what we want them to do.”

To contact the reporters on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Sarah Rabil at srabil@bloomberg.net.


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