Can Wilmar sustain profit pressures and rising debt-related risks?

SINGAPORE - Trouble could be brewing for agri-commodities processor Wilmar International as financing costs rise and profits come under pressure from greater competition, analysts said.

Wilmar’s net debt – US$26.6 billion (S$36.1 billion) as at June 30 – is among the highest on the Singapore Exchange and exceeds the firm’s market value of $23 billion, noted Aletheia Capital analyst Nirgunan Tiruchelvam this week.

Aletheia Capital, an investment company, has a sell recommendation on Wilmar, and its profit forecasts for the 2023 financial year are 40 per cent below consensus estimates. There are 13 buy calls and two holds on Wilmar, noted Bloomberg.

While it is not unusual for commodity traders to have higher debt levels than companies in other industries owing to the need to manage inventory levels and price volatility, Mr Tiruchelvam warned that Wilmar’s high debt means interest rate expenses could spike and put further strain on earnings.

The analyst estimated that Wilmar’s net interest costs could hit a high of US$760 million this financial year, up from US$253 million in 2021.

Meanwhile, Wilmar’s return on invested capital has lagged behind its average cost of capital in recent years, Mr Tiruchelvam said, a trend he expects to continue over the next three years.

He noted that Wilmar incurred capital expenditure in 2022 of around US$2.5 billion, which encompassed the construction of new palm oil refineries. Palm oil prices were already falling and are now down by more than 50 per cent since last year, owing to mounting inventories in Malaysia and Indonesia.

Global soya bean production is also expected to hit record levels at a time when demand has waned in India, one of the world’s largest importers. Soya bean futures are down by 17 per cent from their 2018 peak.

Futures prices reflect market expectations about the forward prices of underlying assets.

Wilmar is among the world’s largest palm oil processors and is China’s biggest soya bean processor, which also means it carries larger inventories that could be at risk of devaluation if demand falls, Mr Tiruchelvam said.

A Wilmar spokesman told The Straits Times that the bulk of the company’s debt comprises short-term trade financing facilities used to obtain raw materials, and these loans can be obtained in currencies with lower interest rates, such as the renminbi.

He added that besides debt financing, Wilmar also deploys internally generated funds for capital expenditure.

On Aug 11, Wilmar reported earnings of US$550.9 million for the first half ended June 30, down 52.7 per cent from the same period last year, while revenue fell 10 per cent to US$32.5 billion.

The company said net loans and borrowings decreased, leading to an improvement in its net gearing ratio to 0.89 times in the first half, from 0.94 times in 2022.

The ratio assesses how much a company relies on debt to finance its operations and investments compared to its own funds.

Chairman and chief executive Kuok Khoon Hong said the 2023 first-half results were significantly lower than the first half of 2022 due to a slowdown in sales of its consumer products, lower palm oil prices as well as lower processing margins at some of its refineries. Operating costs also rose.

Despite the lower earnings, Wilmar maintained an interim dividend of six cents a share.

Mr Kuok expects the second half of the year to improve as Wilmar’s new condiments and central kitchen businesses begin to contribute more to revenue.

The spokesman added that the second half is typically stronger than the first “due to seasonal holidays in China, such as Mid-Autumn Festival, Golden Week as well as consumers stocking up ahead of Chinese New Year”.

Companies which Mr Kuok has a deemed interest in purchased around 8.9 million Wilmar shares at between $3.56 and $3.695 apiece this week, taking his deemed stake from 13.19 per cent to 13.38 per cent.

The shares closed on Friday at $3.60, up 0.28 per cent, but they have fallen 12.41 per cent since the start of the year.

At those levels, Mr Tiruchelvam noted that Wilmar stock is overvalued in light of the faltering returns, poor earnings growth and rising risks, and should be worth just $2.58 in the next 12 months.