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Introduction

Wilmar International Limited is one of Asias leading agribusiness group and the worldlargest producer of palm oil. Like Berkshire Hathaway, Wilmar International Ltd ismainly a holding company providing management services to its subsidiary companies. Itis among the largest listed companies by market capitalization on SGX. As at July 172010, its main source of revenue comes from its palm oil production and main country ofoperations 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, CSRs sugar and renewable energybusiness 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 andin its joint venture with Mackay Sugar Limited, holds the exclusive Australian and NewZealand distribution licenses for Equal, an artificial sweetener)3) Bioethanol (The second largest Australian producer of fuel bioethanol and the largestsupplier of industrial ethanol to the Australian market for over 100 years)

Though the acquisition of Sucrogen is Wilmars first move into the sugar business, Ibelieve the move is rational and would greatly improve their future profitabilityconsidering Wilmars past success on acquiring other agribusinesses and turning it intohuge profits for the group particularly its palm oil business. The other added advantage isWilmar CEO, Mr. Kuok Khoon Hong, expertise in Agribusiness development and hisuncle, Robert Kuok, who is the single largest shareholder of Wilmar (through The KuokGroup and PPB Group) and founder ofPerlis Plantations Bhd(PPB) in 1968, whichstarted off as a sugar producer and is one of the market leader of all its core businessincluding sugar production. I believe the synergy of both Mr. Kuok Khoon Hongexpertise in Agribusiness Development and Mr. Robert Kuok experiences and expertisein the sugar business would prove to be more than the sum of its part. So I strongly

believe Wilmars first venture into the sugar business would be successful.

The other key factors are Sucrogen significant logistical cost advantages that makes itone of the worlds lowest cost producers of sugar and is competitive with producers inBrazils central south region and Sucrogen owns leading consumer brands associatedwith quality at least in Australia if not in other countries.

http://en.wikipedia.org/wiki/Perlis_Plantations_Bhdhttp://en.wikipedia.org/wiki/Perlis_Plantations_Bhdhttp://en.wikipedia.org/wiki/Perlis_Plantations_Bhd

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Figure1: Financial impact of the acquisition

Figure 1 shows the key financial information pertaining to Wilmar before and afteracquisition. The key information is the Net Debt to equity which have increased from0.41 times to 0.54 times but nevertheless their profits have increase tremendously evenduring the recent financial crisis, their Net Profit After Tax have increased from FY2007US$580.4m to FY2008 US$1,531.0m to FY2009 US$1,882.0m.

Recommendation

BUYPrice 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 FY11ERevenue 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 infair value of biological assets

0 17.0 44.4 20.1

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

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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 FY11ECash & 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 170Total 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)US$ (In Millions)

1,531.0 1,882.0 2126.2 2250.6

Earnings Per Share (EPS)

US$

0.24 0.295 0.333 0.353

P/E (x) 26.3 21.4 19.0 17.9

Dividend Per Share (DPS)US$

0.05 0.05 0.06 0.07

Dividend Yield (%) 0.79 0.79 0.95 1.11

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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, butit 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 thinkshould pick up with economies of scale. Oilseed crushing margins should remain helpedby 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 Wilmarmore than its other palm oil competitors like First Resources and Golden Agri. Tounderstand that we must first know that Wilmar palm oil business strategy is to focus onhigh volume palm oil production while First Resources and Golden Agri are focus onminimizing cost (e.g. by maximizing each hectare output and increasing the percentage ofpalm oil extraction rate from each bunch oil palm fruit). That is to say for each tonne ofpalm oil produced, Wilmar production cost will be higher than Golden Agri and FirstResources but Wilmars 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 oildrops.

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Sucrogen future profitability:

Though currently Sucrogen NPAT makes up approximately 1.72% of WilmarInternational NPAT. The figure is expected to grow substantially, as Wilmar has a strongfundamentals driving demand for sugar in key markets where Wilmar has a leadingpresence. (Refer to Figure 2)

Key markets in Asia (Wilmar does most of its agribusiness in Asia) suffer from a sugardeficit of 30% of total annual consumption compared to global deficit of 5%. (Refer toFigure 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 hassignificant manufacturing and distribution facilities. Thus it can enjoy lower cost due tolower transportation cost and economies of scale.Wilmar can also benefit from increasing sugar prices due to increased consumption fromdeveloping 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.

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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 aStrong Buy because its financial ratio especially P/E and P/BV seems to imply that themarket has already priced its future profitability into its current price. Also the IndonesianGovernment allegedly accused Wilmar of a 3.6 trillion rupiah (approximately SGD548M) tax fraud although Wilmar have strongly rejected the claim and the case is stillprogressing. I also believe that major fluctuations in raw material, currency and productprices could also represent a risk to profitability as Wilmar only hedge an undisclosedportion of their underlying commodities.