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A Cross-Border Battle: Singapore And Malaysia’s Giant Consumer Companies

In times of market malaise – like where we find ourselves in at the moment –  there may be many investors who would prefer to invest in companies with more defensive businesses such as consumer staples. Both Singapore and Malaysia are home to some of the largest consumer companies in the region.

In here, let’s pit one of Singapore’s largest consumer companies, Wilmar International Ltd (SGX: F34), against one of Malaysia’s largest, Nestle (Malaysia) Berhad (KLSE:4707.KL). The aim is to see which has the better business fundamentals.

An introduction

Wilmar International is one of the largest agriculture and consumer companies in the world. The S$18.8 billion company owns upstream assets dealing with sugar, palm oil, and other oilseeds & grains. The company is also the biggest consumer cooking oil producer in China.

Wilmar International is not a stranger to Malaysia’s stock market as well. One of its largest shareholders, PPB Group Bhd (KLSE:4065.KL), happens to be a Malaysia-listed stock and a sizeable one at that – PPB Group has a market capitalisation of RM18.6 billion at the moment.

Meanwhile, Nestle (Malaysia) is the Malaysia listed-subsidiary of global consumer food products giant Nestle SA. The RM17.6 billion Nestle (Malaysia) manufactures and sells food & beverage products in Malaysia, although it does a small amount of export business as well. Some of the familiar brands under Nestle’s (Malaysia) portfolio include Nestle, Milo, Maggi, and Nescafe.

Round 1: Revenue and profit

In terms of revenue, there is a yawning gap between the two companies. In 2014, Wilmar International had earned revenue of US$43.1 billion – that’s nearly 40 times Nestle’s (Malaysia) turnover of RM4.8 billion (US$1.2 billion) in the same year.

The story is similar when it comes to the bottom-line. Wilmar International’s net income of US$1.2 billion in 2014 dwarfs the net income of RM550 million (US$134 million) that Nestle (Malaysia) had clocked.

So as you can see, Wilmar International is clearly the winner here in terms of size.

Round 2: Profitability

But interestingly, Nestle (Malaysia) is a far more profitable business compared to Wilmar International.

From 2010 to 2014, Nestle’s (Malaysia) gross margin had been maintained in a tight band of between 32.6% and 35.3%. The company’s huge presence in Malaysia has helped ensure some stability in its business and the firm has also generated a really strong average return on equity of 69% over the same period.

These stand in sharp contrast to Wilmar International’s experience. The firm has an inferior gross margin which had come in at between 8.3% and 8.9% from 2010 to 2014. Meanwhile, due to the huge capital outlay involved in running its business, Wilmar’s average return on equity for that five year block had been only 10%.

Based on the gross margin and return on equity metrics, Nestle (Malaysia) clearly has much better economics.

Round 3: Valuation

At its current share price of S$2.92, Wilmar International is trading at 12 times its last-12-months’ earnings. It also has a dividend yield of 2.6% and a price to tangible book value of 1.2. These do not look to be demanding valuations to me, especially if we compare them to Wilmar International’s historical valuation numbers.

Nestle (Malaysia) on the other hand, has valuation numbers which some investors might not be comfortable with at its share price of RM74.80 at the moment. The company’s valued at 30 times its last-12-months’ earnings and has a dividend yield of just 1.7%. Moreover, it has a price to tangible book value of 24.

Foolish Summary

To sum up what we’ve seen, while Nestle (Malaysia) has better economics, it loses out to Wilmar International in terms of size and valuation. But, do note that none of the above is meant to be taken as the definitive word on the investing merits of both firms; a deeper study is required before any investing decision can be reached.

It’s worth pointing out too that consumer companies can be doing very different things. In the above, we have seen two consumer companies that have wildly different business models, economics, and valuations. Which of the two would you consider to be the better company? Share your thoughts in the comments section below!

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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 writer Stanley Lim owns shares in Wilmar International.