Would Warren Buffett Buy Wilmar International?

Wilmar_logoIn terms of size, Wilmar International (SGX: F34) is up there with the world’s biggest palm oil producers that include Sime Darby, IOI Corporation and Golden Agri-Resources (SGX:  E5H). But will sheer size be enough to convince Warren Buffett that Wilmar might be a good investment?

One thing that Warren Buffett likes is a business with a high margin. That is not something that Wilmar can boast of, though.

Its most recent results reveal that Net Income Margin came in at just 3%. However, taking one year’s numbers in isolation might be a little unfair, given that Wilmar is, after all, a cyclical business. But even at its peak, the Net Income margin was only 8%, which is half the median margin for the 30 companies that make up the Straits Times Index (SGX: ^STI).

That said Wilmar is quite efficient. In fact, its Asset Turnover puts many blue chip peers to shame. An Asset Turnover of 0.99 would suggest that it generates double the amount of revenue for every dollar of asset employed when compared to the average Straits Times Index outfit.

Wilmar’s Asset Turnover could please Buffett. However, the Sage of Omaha might take a dim view of the company’s level of gearing. Its Leverage Ratio of 2.9 would imply that Wilmar is twice as leveraged as the typical Singapore blue chip.

The reason for Buffett’s concern over debt is a company’s exposure to interest rate risk. Interestingly, Wilmar’s shares are not overly volatile. The volatility of 16% is not too dissimilar to the market’s median volatility of 17%.

In terms of cheapness, Wilmar is not particularly expensive. Its current market value of S$22b is only 20% above its book value. Additionally, the shares, which currently cost S$3.43, value the business at 12 times forward earnings.

All told, Wilmar looks to be a typical cyclical business. However, the one thing that might make Buffett think twice is pricing power, or in the case of Wilmar, its lack of pricing power. As a commodity company, Wilmar is a price taker rather than a price maker.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.