Praise for King of Palm Oil as Orangutans Continue to be Slaughtered– Doesn’t anyone care???
27 Aug 2007: Corporate: Agri-commodity king of Asia
By Sunita Sue Leng of The Edge Singapore
Kuok Khoon Hong, chairman and CEO of Wilmar International Ltd, doesn’t just cause a buzz when he enters the basement ballroom of the Fullerton Hotel for his quarterly meeting with the investment community. He commands near adulation. The bevy of corporate bankers — who make up more than half the attendees at the second-quarter earnings briefing — rush to pump his hand. The swelling number of analysts who track his company congratulate him on another set of sterling numbers. The motley crew of reporters who turn up seem almost dumbstruck in his presence.
It’s easy to see why. Tall and stately looking, 58-year-old Kuok leaves no doubt who’s in charge. At the same time, he is extremely jovial and affable for a corporate chieftain. He greets each person who comes up to him like an old friend. He laughs easily and fields questions from the press candidly (although since the company went public in August 2006, he has never given a one-on-one interview). He effortlessly reels off facts about his growing agri-commodity empire and is clear about where he wants to take it.
But most importantly, he has gained an investor following for transforming a low-margin business based on trading and refining palm oil into Asia’s largest agri-commodity company. From upstream (plantations) to downstream (such as oleochemicals) to hot new geographies like China and India — he’s got it all. Plus, he’s thrown in a dash of renewable energy at a time when investors can’t seem to get enough of it.
Following a US$2.7 billion (about RM9.4 billion) mega-merger with the plantation and edible oils and grains businesses of the Kuok Group founded by his wealthy uncle Robert Kuok and a restructuring, Wilmar now has a quarter of the global market for refining and merchandising palm and lauric oils. That makes it the biggest player in the business worldwide. Palm oil is largely used for cooking while lauric oil is used to make soaps, detergents and cosmetics.
In plantations, Wilmar has doubled its landbank to 570,000ha, making it one of the biggest plantation companies in Indonesia and Malaysia. It is also huge in China, where its “Arawana” brand is the top-selling cooking oil. There, it is currently the largest producer of specialty fats and oleochemicals, the largest crusher of oilseeds (namely soya beans) as well as the largest refiner of edible oils.
Over in India, it is among the leading refiners of edible oils and producers of consumer pack edible oils. If all that isn’t enough, this year, Wilmar became a first mover in biodiesel when its 350,000 tonne plant in Riau, Indonesia, fired up in January. Once all three of its plants are up and running next month, the company will be the largest palm-based biodiesel producer in the world, with a capacity of just over a million tonnes a year.
The company has a presence in 32 countries, from China to the Ukraine to Africa. It operates over 160 processing plants, employs some 60,000 people and counts Unilever, Néstle and Procter & Gamble as its customers. And now, with its shares having rocketed 157% over the last year, the company is worth almost S$18.5 billion (about RM42.2 billion), making Wilmar the sixth largest company by market capitalisation on the Singapore Exchange.
In the packed Fullerton ballroom, Kuok announced that the company’s 2Q revenue had jumped 83.6% to US$2.36 billion. Net profit, meanwhile, was up 142.4% to US$39.6 million. One reason for the spike was the one-month contribution from Malaysian plantation company PPB Oil Palms Bhd and palm and lauric refiner PGEO Group Sdn Bhd, part of the recent merger.
However, a good part of the jump was also fuelled by bubbly palm oil prices, which broke records in June. On average, crude palm oil prices rose from US$392 per tonne in June 2006 to US$649 per tonne this June, Wilmar said in its results statement.
For the first six months of this year, Wilmar hauled in a net profit of US$65.6 million. However, with the full impact of its recent billion- dollar merger only set to kick in during the 2H, analysts estimate the bottom line could balloon to US$458.3 million by the year end. That would make Wilmar one of the biggest profit generators in Singapore and put it close to a US agri-giant like Bunge Ltd, which posted a net profit of US$521 million last year.
“In the past, you didn’t find any agriculture commodity giants in Asia,” Kuok tells The Edge Singapore on the sidelines of the results briefing. “All the giants like Cargill, ADM [Archer Daniels Midland] and Bunge were in the West.”
As Kuok sees it, Asia produced plenty of agricultural goods but it had a big, hungry population to gobble it up. Moreover, he explains, the quality couldn’t match that produced in the West. But as per capita incomes rose, demand for quality agricultural products grew. On top of that, the humble palm oil has become a major global commodity and is now the second most consumed edible oil, after soya. “I think we were able to capture that and become an Asian agri-commodity company,” he says.
More than half of earnings to come from China
Refining and merchandising palm and lauric oil remain the backbone of Wilmar. In 1H2007, 49% of profit before tax came from this division. The next largest profit source was the plantations and palm oil milling division, which made up 43% of profit before tax and is a much higher margin business than refining or trading. The soya bean and soya bean meal division is small, accounting for a 3% sliver of pre-tax profit.
That profit mix will change. With the China-dominant operations of Kuok Oils & Grains contributing in 2H, Kuok expects China to provide more than half of the enlarged group’s earnings this year. Per capita consumption of vegetable oils is just 16kg in China versus 37kg in the US. “Just imagine how big the market is,” he says.
Wilmar’s plantations business is likely to make up at least a third of group earnings, depending on palm oil prices. The nascent biodiesel business, once expected to be a growth driver, is now likely to have a minor starring role. Owing to high palm oil prices, Kuok says the business is seeing “negative margins”. However, subsidies of US$303 per tonne in the US and €300 (about RM1,411) per tonne in Europe are providing relief and the company expects to post a S$45 million profit for the biodiesel business this year.
According to a DBS Vickers report dated Aug 15, management has said that this year’s returns have already covered their investment outlay of US$40 million for the three biodiesel plants, as they had hedged the feedstock last year. “In the worst-case scenario, if the situation does not improve over the long term, we believe the biodiesel plants could be converted into refineries at minimal additional cost,” the report adds. However, as Kuok notes, nothing goes up forever. “If the palm oil price comes down, our biodiesel will benefit,” he says.
The nephew also rises
This fast-expanding agri-business footprint is a long way from 16 years ago when Malaysia-born Kuok, now a Singaporean, abruptly cut short his promising career at the commodities trading group built by his uncle Robert. Robert Kuok, now 83, is known as the “Sugar King” for the fortune he created out of buying and selling sugar as well as flour and rice. The younger Kuok started out trading flour at the family firm, a business for which he still has a soft spot and that he hopes to build upon in China.
By March 1991, he had risen to the post of general manager of Malaysia’s Federal Flour Mills as well as managing director of Singapore-based Kuok Oil & Grains Pte Ltd. Then, as he tells it, he got “bored”, although within the industry it sparked talk that he had fallen out with his rich uncle. Together with a partner by the name of Martua Sitorus from Medan, Indonesia, Kuok ventured out on his own, starting with 7,100ha in Western Sumatra.
The start-up progressed from growing oil palm to crushing, refining and milling the crop. Four years later, Wilmar bought its first bulk vessel to ship refined palm oil products to customers. In 1996, the refinery business was expanded to Malaysia and, two years later, Wilmar had diversified into making specialty fats such as margarine, selling its own branded cooking oil and making fertiliser. Kuok also managed to get ADM on board as a shareholder. Last year, the US agricultural processing giant’s net profit amounted to US$2.16 billion. Postmerger, ADM remains a shareholder with a 6.7% stake.
Technically, the relationship with Robert is a little removed: The younger Kuok’s grandfather and Robert’s father were brothers. But there is an uncanny physical resemblance between the two. And, as players in the industry will attest, the younger Kuok shares his uncle’s acumen for the commodities trading business and deal-making prowess. “I’m impressed by his detailed knowledge of the agri supply chain and his grasp of the big picture in Asia,” says Nirgunan Tiruchelvam, an analyst at ABN Amro Asia Securities.
Savvy exchange
That acumen extends to financial savvy. Kuok had successfully floated Wilmar through a reverse take over of EzyHealth on Aug 8 last year. Just four months later, he boldly proposed amalgamating the much smaller Wilmar with the Kuok Group’s vast palm plantation, edible oils, grains and related businesses in a deal worth US$2.7 billion. Separately, Wilmar would also acquire the edible oils, oilseeds, grains and related businesses of its parent Wilmar Holdings Pte Ltd, including interests held by ADM in these businesses, for US$1.6 billion.
Wilmar issued a total of 3.85 billion new shares for this mega deal — shares which were trading at premium valuations fuelled in part by the market’s exuberance over Wilmar’s relatively tiny biodiesel foray. As Goldman Sachs pointed out in a Dec 15 report, Wilmar acquired the assets — which included the higher-margin plantations business — at an average price-to-earnings ratio (PER) for estimated 2006 earnings of 13.6 times. That was less than half of Wilmar’s own PER at the time, which was a lofty 30.9 times.
Indeed, not everyone was happy with the terms of the share exchange. A group of shareholders of PPB Oil Palms, led by Malaysia’s Employees Provident Fund, claimed that PPB Oil Palms deserved higher valuations as it was in the more profitable upstream business. Wilmar had offered 2.3 Wilmar shares for each PPB Oil Palms share. It held out on the offer at the first close, on May 7, leaving Wilmar with 87% acceptances.
However, after Wilmar indicated that it would seek to delist PPB Oil Palms even if the 90% threshold hadn’t been reached, some investors threw in the towel. Wilmar eventually received 99.08% acceptances and PPB Oil Palms was delisted from Bursa Malaysia on May 31, 2007. Today, Wilmar Holdings Pte Ltd owns 48.5% of Wilmar while the Kuok Group owns 31%, leaving 13.8% in the hands of the public.
Target of environmentalists
As Asia’s biggest agri-commodities company, Wilmar is now more visible than ever — and a target for environmentalists and interest groups. In June, non-governmental organisation (NGO) Friends of the Earth Netherlands published a 100-page report charging that three subsidiaries owned or managed by Wilmar in Kalimantan, Indonesia, were illegally burning land and clearing conservation forest. The three subsidiaries represent 7% of Wilmar’s total landbank, says Friends of the Earth.
Wilmar has refuted the claims, saying that it has a strict zero-burning policy in place, as required by Indonesian law. It points out that most of the fires at the three subsidiaries occurred in its planted area and were accidental. “[We] certainly will not set fire to our plantings,” it says.
The company adds that it does not engage in logging activities and only develops plantations on land approved by the government for the cultivation of oil palm. “Whilst legal proceedings on the above are ongoing, we have been advised by our external legal counsel that our case is highly defensible,” it says in a July 4 statement.
When asked for his view, Kuok responds by pointing out that the area under dispute is about 200ha, too small by Wilmar’s standards to risk something as damaging as open burning.
“I believe that no major plantation group today would dare to burn. With satellite monitoring, you cannot escape,” says Kuok, adding that the company would be “nuts” to do something like this.
Friends of the Earth has lodged a complaint against Wilmar with the Roundtable on Sustainable Palm Oil (RSPO). The RSPO, formed in 2004, is an association of stakeholders in the palm oil value chain centred on growing and using sustainable palm oil. Wilmar is a participant in the RSPO, which includes growers, processors, consumer goods manufacturers, NGOs and financial institutions. On Aug 9, the RSPO said a grievance panel had been established to address the complaint lodged against Wilmar.
Forest reserve issue
A second concern about its landbank is that, according to industry insiders, a large part of land in Kalimantan is gazetted as permanent forest reserve and cannot be converted into plantations. According to Friends of the Earth, most of the new expansion by Wilmar will take place in west and central Kalimantan. Data from the company indicates that over half of Wilmar’s landbank of 570,000ha is in Indonesia.
Most of the new landbank is indeed in Kalimantan as the areas in Sumatra are mostly planted. For instance, according to the PPB Group’s annual report for 2006, PPB Oil Palms had 283,221ha of land in Indonesia. Just under a fifth of this land — which is primarily in Kalimantan — has been planted. When asked, Kuok doesn’t appear too fazed about the land issue, saying that maybe “some small areas” could be permanent forests. The company says it plans to plant 40,000ha each year.
Analysts still bullish
Wilmar may not have too many NGO friends but investors and analysts are still enthusiastic about the company. There are eight “buy” calls and just one “hold” (by Credit Suisse), with target prices ranging from S$3.30 to S$4.76, according to Thomson Financial data. At 23.8 times this year’s consensus forecast earnings and 17.4 times for next year, Wilmar isn’t cheap though. Stocks on the Straits Times Index are collectively trading at 12 times currently. Meanwhile, shares in US-listed Bunge are trading at 17.8 times earnings, while ADM is at 11.9 times.
However, the analysts and investors who have been cheering Kuok on expect him to deliver faster growth than other players in the agri-commodity sector. According to Tiruchelvam of ABN Amro, Wilmar is undervalued on a PER-to-growth (PEG) basis. It is trading at less than half of Olam International’s PEG ratio and almost a third of China Agri Industries’ ratio, he says.
Will Kuok live up to those lofty expectations? He hasn’t given the market any reason to doubt his ability so far. But amid the ever-present uncertainty in commodity markets, anything can happen.
