This article first appeared in The Edge Malaysia Weekly on May 14, 2018 - May 20, 2018

TWO and a half years after Pua Seck Guan was appointed chief operating officer of Wilmar International Ltd, shareholders are still wondering why the real estate veteran was chosen instead of an agribusiness expert. Pua is also the CEO of Perennial Real Estate Holdings Ltd and some are wondering if Wilmar will eventually absorb Perennial, especially after it raised its shareholding in the latter to 20% last November.

However, expanding into real estate has never been the goal of Wilmar, a company built on oil palm trading.

While Kuok Khoon Hong, Wilmar’s co-founder, chairman and CEO, has been putting more of its resources as well as his own money into real estate and is likely to continue doing so, it is not so much the potential appreciation of real estate assets as it is about the business links and partnerships that will aid the downstream expansion of the company’s sprawling agribusiness.

“We are looking at expanding into prepared food — simple, nutritious food that people can just heat up and enjoy,” Kuok tells The Edge.

More details on the prepared food business will be announced when they are firmed up, says Kuok. Rising affluence, with a growing middle class in China and the rest of Asia, means more people can afford better options.

“Starbucks coffee was expensive 10 years ago but today, many people in China and the rest of Asia are drinking them and many more will be able to afford them and other [simple luxuries] like chocolate and a good meal as the economy develops,” says Kuok, who has been non-executive chairman of Perennial since October 2014.

As a society matures and ages, people also make healthier choices.

“Buckwheat noodles are suitable for people with diabetes and taste good,” says Kuok, revealing that Wilmar has the largest buckwheat noodle-making factory in China.

A quarter of Japan’s population of 127 million are above 65 and consume significant amounts of buckwheat (soba) noodles.

Wilmar also began selling heart-friendly rice-bran oil in Japan recently. Rice-bran oil commands a premium over soybean and rapeseed oil that are popular in China. Japan, which has a population one-tenth the size of China’s 1.4 billion people, reportedly consumes 80,000 tonnes of quality rice-bran oil every year, China’s population is also ageing and would demand better health food and related services.

Establishing a prepared food business would also position Wilmar as a strong potential supplier to various institutions, from hotels and restaurant chains to hospitals and eldercare homes.

While real estate is not Wilmar’s core business, Kuok says it will put more money into it if the right opportunity comes along, now that it has the financial muscle as well as the expertise. He adds that Wilmar is also more likely to put money into expanding its downstream business rather than buying more oil palm estates as the upside potential is greater.

The healthcare link

Kuok has always maintained that Pua was brought in for “his management skills and ability to work with partners” and “not for his property expertise”. However, his real estate background is an advantage.

Perennial — where Pua says he spends half of his time — owns, develops and manages real estate in Penang as well as in China, Singapore and Ghana. It also invests in healthcare and eldercare in China, where more than 220 million people, or 16% of the population, are over the age of 60.

The company’s healthcare portfolio includes a 49.9% stake in Shanghai’s largest private eldercare service provider Shanghai RST Chinese Medical (Renshoutang) and a 1,077-bed public-private partnership nursing hospital and retirement home project with the Wuhan municipal government. Others include the Perennial International Health and Medical Hub and Chengdu Xiehe International Eldercare and Retirement Home, both located within its signature Chengdu East high-speed rail (HSR) integrated development.

In January, Perennial (with a 45% stake), backed by Kuok (4% ) and a Wilmar subsidary (2%), partnered Hong Kong-listed Shun Tak Holdings Ltd (30%) to set up a US$1.2 billion healthcare fund to invest in HSR-integrated healthcare mixed-use developments in tier one, strong tier two cities and provincial capitals in China.

The fund “provides Perennial with an asset-light platform to potentially grow its HSR portfolio from two to eight projects with a total gross floor area of over four million sq m, positioning Perennial as a leading player with the largest HSR portfolio”, Perennial’s 2017 annual report read.

Others that contributed to the fund’s initial investment of US$500 million are Bangkok Bank pcl (10%), a unit of BreadTalk Group Ltd (5%) and S1F Pte Ltd (4%). At that time, Pua had said the venture marked Perennial’s first foray into the hospitality business via a hotel management partnership with Shun Tak, a property and transport company founded by Macau gaming billionaire Stanley Ho, and now headed by his daughter Pansy.

Pua is regarded as a pioneer of real estate investment trusts in Singapore. He left CapitaLand Ltd in 2008 and went on to set up Perennial, which snapped up several landmark properties in Singapore. When he was looking at listing Perennial China Retail Trust (PCRT) in 2012, a private banker took him to see Kuok.

Perhaps it was then that Kuok — described as someone with “a special entrepreneurial talent to see an opportunity and turn it into a thriving business” by his uncle, Sugar King Robert Kuok — saw the opportunity to further expand Wilmar’s core agribusiness. Wilmar has 20.2% stake in Perennial, which has a S$1.43 billion market capitalisation. Kuok holds a 35.67% stake while Pua has 10.3% of Perennial.

In Wilmar’s latest 2017 annual report, Kuok said Wilmar “believes in the importance of connectivity between markets” and had over a span of 26 years, steadily built a presence — be it marketing, manufacturing or distribution — in over 50 countries, allowing its products to reach customers efficiently in over 150 countries.

“The bulk of our global footprint sits along the routes of the Belt Road Initiative (BRI) [connecting Asia, Europe and Africa],” Kuok said in the report. “The intrinsic value of such an extensive footprint is the access to market information that is critical for trading and identifying significant business opportunities. This is Wilmar’s unique competitive advantage and it is not something that can be replicated easily.”

‘I pray every day’

At its recent annual general meeting, a shareholder questioned Wilmar’s trading activities, asking Kuok if too much of the group’s earnings rested on the company’s ability to read the oilseeds and grains market correctly.

“That’s why I pray every day,” Kuok replied, eliciting laughter from the floor. Still, trading profits are not from sheer luck. He added that trading profits from oilseeds helped fuel Wilmar’s growth and remains an area where it has a significant advantage due to its extensive agribusiness network.

At the same time, he said Wilmar had diversified its portfolio from oil palm to sugar, flour and rice as well as grown other businesses such as consumer pack staples and basic food products that can provide a more stable income stream and where it enjoys economies of scale.

Apart from being the largest raw sugar producer and refiner in Australia, the leading sugar refiner in Indonesia and the top consumer pack sugar manufacturer in Australia and New Zealand, Wilmar is also the world’s largest sugar trader,Kuok said.

Scale has its advantages but agribusiness is such that not every outcome is predicable even with the best information. Weather, for instance, is a wildcard and government intervention is another.

In early 2012, for instance, Wilmar’s profits fell by one third year on year due to weak crush margins and “poor timing of [soy]bean purchases” that resulted in a US$52.5 million pre-tax loss at its oilseeds segment. In 2Q2016, Wilmar gave a profit warning before posting its first-ever quarterly losses as the “untimely” purchase of soybeans hurt its oilseeds and grains business while its sugar business was hit by bad weather and hedging losses.

Soybean prices could stay volatile in the coming quarters due to the prospects of China imposing tariffs on US soybeans but Kuok sees better performance from its other businesses, such as flour and rice, mitigating any short-term impact on its oilseeds crushing business. He does not expect a prolonged standoff between China and the US. Analysts have said pressure from US soybean farmers could aid China’s hand.

In the long run, Kuok is confident of Wilmar getting it right more times than not.

‘Other income’ and dividends

Wilmar intends to pay more dividends to shareholders going forward, something that may help cushion concerns over the more volatile part of its business. Wilmar could be in a better position to do so next year if the planned IPO of Wilmar China on the Shanghai Stock Exchange is a success.

The plan is to list 10% of Wilmar China on the A-share market, which can only be priced up to 23 times earnings, once regulatory approval is obtained. The cap on pricing does not apply to subsequent share offerings in China. Kuok says Wilmar will sell more shares if demand is good and use the proceeds to pay more dividends.

The dividend of 19.3 US cents per share for FY2017 was the highest in four years. Wilmar’s net profit of US$1.22 billion for FY2017 came in 25.4% above US$972 million in FY2016 and was the highest since US$1.32 billion in FY2013.

“We have more than US$1 billion cash for investments [and capital expenditure] every year, even if we were to raise dividends,” Kuok says.

It would seem that returns from investments could also be another feature to watch out for in Wilmar’s earnings reports going forward.

It is worth noting that it enjoyed a gain of US$21.6 million on the back of higher dividend income received from its investment portfolio in 1Q2018, lower than the US$53.3 million seen in 1Q2017, in the absence of investment gains. It also marked to market some losses from its investment in securities owing to weaker market conditions.

In a statement last Thursday, Kuok said he is “cautiously optimistic” that Wilmar’s performance for the rest of 2018 will be “satisfactory” even as the group reported a 41% y-o-y decline in profit to US$203.3 million for the first quarter ended March 31 on a “difficult operating environment for tropical oils and seasonal sugar losses during the quarter”.

It remains to be seen if the prospects of Wilmar China’s IPO and its potential benefits are enough to boost investor sentiment. Analysts have said a botched listing could hit sentiment.

Fielding questions on the sidelines of Wilmar’s recent AGM, Kuok won brownie points from shareholders who appreciated “the straight answers” he gave to those interested in Wilmar’s growth prospects.

While Kuok said he had “has nothing to hide”, he understandably could not give a “yes or no” answer when one Mrs Tan asked if she should invest her CPF money in Wilmar.

Just for her though, Kuok offered to pay the difference if she lost any money within two years from buying 1,000 Wilmar shares at S$3.15 each, which was the stock’s recent low on April 17.

From S$3.22 before the AGM on April 25, Wilmar shares reached as high as S$3.28 on May 2 before closing at S$3.21 on May 10. At the time of writing, there were 10 “buy” calls, six “hold” and one “sell” from 17 analysts who have yet to update their calls post 1Q2018 results. Target prices ranged between S$2.89 and S$4.10.

Those considering Kuok’s offer to Mrs Tan to boost their retirement kitty might want to know that Kuok bought 4.86 million shares for S$15.18 million, or an average cost of S$3.12 each, between Feb 23 — the day after Wilmar announced its 2017 results — and March 19 to raise his holdings to 12.27%.

Including an 18.5% block held by PPB Group Bhd, the Kuok Group, which is led by Robert Kuok, owns a 33.78% stake in Wilmar. Wilmar contributed 78% of PPB’s 2017 profits. Chicago-based food processing company and commodities trader Archer Daniels Midland Co (ADM) has 24.89% shareholding while Wilmar co-founder and former COO Martua Sitorus has 1.82%.

Time will tell if Wilmar succeeds in catering for the rising demand of an ageing population in more ways than one.

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