Introduction

Wilmar International Limited is one of Asia’s leading agribusiness group and the world
largest producer of palm oil. Like Berkshire Hathaway, Wilmar International Ltd is
mainly a holding company providing management services to its subsidiary companies. It
is among the largest listed companies by market capitalization on SGX. As at July 17
2010, its main source of revenue comes from its palm oil production and main country of
operations is in Indonesia.

Recent Developments
Acquisition of Sucrogen Limited:

On July 05 2010, Wilmar Australia Pty Ltd, a wholly-owned subsidiary of the Company,
has entered into a Share Sale Agreement with CSR Limited (“CSR”) to acquire 100% of
the ordinary share capital of Sucrogen Limited, CSR’s sugar and renewable energy
business for A$1.75 billion (S$2.06 billion).

The 3 main products of Sucrogen are:

1) Cane Products (in which it is Australia largest raw sugar producer)
2) Sweeteners (in which it is the largest sugar refiner in Australia and New Zealand and
in its joint venture with Mackay Sugar Limited, holds the exclusive Australian and New
Zealand distribution licenses for Equal, an artificial sweetener)
3) Bioethanol (The second largest Australian producer of fuel bioethanol and the largest
supplier of industrial ethanol to the Australian market for over 100 years)

Though the acquisition of Sucrogen is Wilmar’s first move into the sugar business, I
believe the move is rational and would greatly improve their future profitability
considering Wilmar’s past success on acquiring other agribusinesses and turning it into
huge profits for the group particularly its palm oil business. The other added advantage is
Wilmar CEO, Mr. Kuok Khoon Hong, expertise in Agribusiness development and his
uncle, Robert Kuok, who is the single largest shareholder of Wilmar (through The Kuok
Group and PPB Group) and founder of Perlis Plantations Bhd (PPB) in 1968, which
started off as a sugar producer and is one of the market leader of all its core business
including sugar production. I believe the synergy of both Mr. Kuok Khoon Hong
expertise in Agribusiness Development and Mr. Robert Kuok experiences and expertise
in the sugar business would prove to be more than the sum of its part. So I strongly
believe Wilmar’s first venture into the sugar business would be successful.

The other key factors are Sucrogen significant logistical cost advantages that makes it
one of the world’s lowest cost producers of sugar and is competitive with producers in
Brazil’s central south region and Sucrogen owns leading consumer brands associated
with quality at least in Australia if not in other countries.
 Figure1: Financial impact of the acquisition

Figure 1 shows the key financial information pertaining to Wilmar before and after
acquisition. The key information is the Net Debt to equity which have increased from
0.41 times to 0.54 times but nevertheless their profits have increase tremendously even
during the recent financial crisis, their Net Profit After Tax have increased from FY2007
US$580.4m to FY2008 US$1,531.0m to FY2009 US$1,882.0m.

Recommendation

BUY
Price at 23 July 2010 (SGD) 6.32
Price target – 12mth (SGD) 7.46
52-week range (SGD) 5.25 - 7.29

Financial Statements
Income statement (US$mn)
Year-end 31 Dec FY08 FY09 FY10E FY11E
Revenue 29,145.2 23,885.1 28,310.6 30,720.2
Cost of sales (25,585.4) (20,882.1) (25,590.4) (26,690.3)
Gross profit 3,559.8 3,003.0 3,720.2 4029.9
Net gains arising from changes in 0 17.0 44.4 20.1
fair value of biological assets
Other operating income 275.5 469.8 490.5 439.5
Selling and distribution costs (1,577.5) (833.2) (1,170.1) (1,211.3)
Administrative expenses (264.4) (286.9) (322.1) (300.8)
Other operating expenses (82.1) (78.1) (83.5) (90.1)
Financial income 92.9 97.5 101.1 103.4
Finance expenses (326.1) (140.9) (250.2) (210.2)
Share of results of associates 111.2 46.2 55.3 40.2
Profit before tax 1,789.3 2,294.40 2,585.6 2,820.7
Tax expense (232.1) (324.1) (387.8) (423.1)
Profit for the year 1,557.2 1,970.3 2,197.8 2397.6
Attributable to:
Equity holders of the Company 1,531.0 1,882.0 2,126.3 2,250.6
Minority interests 26.2 88.3 71.5 147.0

Balance Sheet (US$mn)

Year-end 31 Dec FY08 FY09 FY10E FY11E
Cash & equivalents 2,893 5,135 5,559 4,511
Accounts receivable 2,077 3,174 4,085 5,112
Inventories 2,468 3,940 5,196 6,424
Other current assets 855 622 622 622
Total current assets 8,293 12,871 15,462 16,670
LT investments 1,202 1,184 1,184 1,184
Fixed assets 4,273 5,073 5,966 6,569
Goodwill 3,942 4,028 4,028 4,028
Other LT assets 158 293 293 293
Total assets 17,869 23,449 26,933 28,744
Short-term debt 3,677 8,374 8,874 8,874
Accounts payable 1,840 1,824 3,237 3,201
Other current liabilities 405 170 170 170
Total current liabilities 5,923 10,369 12,282 12,245
Long-term debt 1,056 1,206 1,206 1,206
Convertible debt 550 -- -- --
Other LT liabilities 364 463 463 463
Total liabilities 7,894 12,037 13,950 13,914
Minority interest 369 481 559 650
Common stock 8,403 8,414 8,414 8,414
Retained earnings 2,322 3,822 5,314 7,071
Other equity and reserves (1,118) (1,305) (1,305) (1,305)
Total shareholders' equity 9,606 10,931 12,424 14,180
Total equity & liabilities 17,869 23,449 26,933 28,744

Earnings Forecast Table

2008 2009 2010E 2011E

Net Profit After Tax (NPAT) 1,531.0 1,882.0 2126.2 2250.6

US$ (In Millions)
Earnings Per Share (EPS) 0.24 0.295 0.333 0.353
US$
P/E (x) 26.3 21.4 19.0 17.9

Dividend Per Share (DPS) 0.05 0.05 0.06 0.07

US$
Dividend Yield (%) 0.79 0.79 0.95 1.11
 Key Indicators (FY 2009)
P/BV (x) 3.7
ROE (%) 18.3
Net Debt/Equity (x) * 0.54
EV/EBITDA (x) 13.4

*After acquisition of Sucrogen

Reasons for recommendation (Buy)

Management expects stronger 2H10:

Wilmar said maintaining 19% volume growth as in 1Q10 may be difficult to sustain, but
it expects volumes to stay strong, supported by a Gresik refinery coming online in 2H,
and strong volumes in rice and flour. Margins on rice and flour are very low, but we think
should pick up with economies of scale. Oilseed crushing margins should remain helped
by a Chinese ban on Argentine soya oil imports.

Recent surge in palm oil Prices:

The recent surge of the palm oil prices (since its 2008 major low) could help Wilmar
more than its other palm oil competitors like First Resources and Golden Agri. To
understand that we must first know that Wilmar palm oil business strategy is to focus on
high volume palm oil production while First Resources and Golden Agri are focus on
minimizing cost (e.g. by maximizing each hectare output and increasing the percentage of
palm oil extraction rate from each bunch oil palm fruit). That is to say for each tonne of
palm oil produced, Wilmar production cost will be higher than Golden Agri and First
Resources but Wilmar’s total volume/tonnage production will be higher.
This means that if the palm oil prices increases, Wilmar will stand to gain more compared
to First Resources and Golden Agri while the opposite is true when the price of palm oil
drops.
Sucrogen future profitability:

Though currently Sucrogen NPAT makes up approximately 1.72% of Wilmar

International NPAT. The figure is expected to grow substantially, as Wilmar has a strong
fundamentals driving demand for sugar in key markets where Wilmar has a leading
presence. (Refer to Figure 2)

Key markets in Asia (Wilmar does most of its agribusiness in Asia) suffer from a sugar
deficit of 30% of total annual consumption compared to global deficit of 5%. (Refer to
Figure 3)

Wilmar has states its intention to transform Sucrogen into a world-class sugar business.
Wilmar also states the potential to expand operations to China and India where it has
significant manufacturing and distribution facilities. Thus it can enjoy lower cost due to
lower transportation cost and economies of scale.
Wilmar can also benefit from increasing sugar prices due to increased consumption from
developing countries, especially in Asia.

Thus I believe that few years from now, Sucrogen total profit could make up at least 15%
of Wilmar International Ltd total NPAT.
 Figure 2: Sugar Consumption against GDP

Source: ANZ Economics & Market Research, IMF World Economic Outlook

Figure 3: Sugar Production, Consumption & Deficits

Source: International Sugar Organization May 2010 Report World Sugar Balance

Conclusion:

Despite Wilmar strong future profitability, I gave it a Buy recommendation instead of a

Strong Buy because its financial ratio especially P/E and P/BV seems to imply that the
market has already priced its future profitability into its current price. Also the Indonesian
Government allegedly accused Wilmar of a 3.6 trillion rupiah (approximately SGD
548M) tax fraud although Wilmar have strongly rejected the claim and the case is still
progressing. I also believe that major fluctuations in raw material, currency and product
prices could also represent a risk to profitability as Wilmar only hedge an undisclosed
portion of their underlying commodities.