Wilmar to continue with property investments, chief says: Update

Stock Name: Wilmar
Company Name: WILMAR INTERNATIONAL LIMITED
Research House: OCBC

Wilmar International, the world’s biggest palm oil processor, will continue to invest in property as land prices in China’s third- and fourth-tier cities are so low and sure to rise, Chief Executive Officer Kuok Khoon Hong said.

The move into real estate, announced on Dec. 21, prompted Nomura Holdings Inc. to cut Wilmar to a “hold” from a “buy.” Citigroup Inc. and Goldman Sachs Group Inc. questioned the agriculture trading and supply company’s rationale. Wilmar has fallen 12% since the announcement in Singapore, compared with a 4% drop in the local benchmark index.

“Property prices will definitely go up in China,” Kuok told reporters at a briefing in Singapore today, comparing the growth prospects in China’s smaller cities to Singapore of 20 years ago. Prices are at a level where “we can’t lose money,” he said.

Paris-based Louis Dreyfus SAS, which operates the world’s biggest rice and cotton trading operation, also has a real estate unit that invests in commercial property and resort hotels. Japan’s fourth-largest trading company, Marubeni Corp., has a real estate development unit alongside its energy, timber, metals and food units.

PARTNERS

Wilmar’s decision to move into hotel, commercial and real estate business in China is supported by its partnership with Kerry Properties (China) and hotel-operator Shangri-La China, which are also affiliate entities, Kuok said. Should Wilmar gain enough expertise, it may invest in property independently in four to five years, he said.

The palm oil trader has processing units in most Chinese regions and has good relations with the local government, Kuok said. The initiative for investing in land to build up hotels came from Chinese local government officials, he said.

A build-up in real estate comes as Wilmar’s margins in oilseed and grains business narrow, contributing losses for the last six months of 2010 at the same time as record palm oil prices conflict with the Chinese government’s caps on cooking oil retail prices. Wilmar made a US$173.2 million (221 million) pre-tax loss in the fourth quarter on its oilseed and grains business, the company said in a regulatory statement today.

TA Securities analyst James Ratnam cut Wilmar to a “hold” from a “buy” today, with a 12-month target price of $5.80 per share. Carey Wong, an analyst, at OCBC Investment Research in Singapore also downgraded Wilmar to a “hold” from a “buy” today with a 12-month price target of $4.90.

The losses are partly due to Wilmar not expecting such a rapid rise in crude palm oil and not buying enough of the raw material to process in time, Kuok said. Crude palm oil rose 62% in the second half of 2010.

MARGINS TO IMPROVE

This year’s margins will improve as Wilmar expects China to help processing companies with sales of oil stocks at prices below market rates, Kuok said.

China is selling rapeseed oil and soybeans to companies from state reserves to curb prices, three executives with direct knowledge of the matter said Jan. 18. Cofco  and Wilmar were among the companies in line to get 450,000 metric tons of rapeseed oil at 8,500 yuan ($1,649) a ton and 350,000 tons of soybeans, the people said.

The price of the rapeseed oil compares with 9,300 yuan in Jan. 18 state auctions. The discount on the new sales was to compensate companies that were told by the government not to raise prices, the executives said.

“If people don’t allow you to increase they think of some way to help you out with cheap oil,” Kuok said. “The Chinese are very practical people. But you know these are difficult times. And we are still making money, just look at the last few years.”

To offset shrinking crushing margins, Wilmar will continue to expand in new businesses in related consumer brand products in China, India and Indonesia, Kuok said.