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Wilmar: Is the tide turning as buying pressure returns?

Friday, September 14, 2012

I bought more shares of Wilmar as its price went to a new low yesterday. Some might question why I did this. Was I not afraid of losing even more money? Well, it was a calculated risk based on certain technical signs.

As Wilmar's share price went lower, I noticed that the CMF was forming higher lows. So, share price was forming a positive divergence with the CMF. What is CMF?

CMF stands for Chaikin Money Flow. This is a money flow oscillator that measures buying and selling pressure. When the CMF is in positive territory, the bulls have the upper hand. When it is in negative territory, the bears are stronger.

So, if we look at Wilmar's chart, selling pressure was reducing even as its share price drifted lower.  We can see the selling pressure letting up with the CMF forming higher lows. It is a process.

When the CMF forms a bullish divergence while still in negative territory, it is saying that selling pressure is reducing. When the CMF crosses over to positive territory, it is saying that smart money has moved back in and selling pressure has given in to buying pressure. So, the smart money are buying as weaker long holders or late short sellers continue to sell at lower prices. Yes, price could continue to move lower even as buying pressure returned and it did.

Those who short sold as share price retested and broke the low of $3.04 just a few sessions ago probably contributed to the heavy buying today as they scurried to close their short positions.

If we double check with the MACD which is a pure price oscillator, we notice that it did not form new lows even as share price moved lower. If we check the MFI, a favourite of mine as it takes in price and volume and more effectively measures demand, we see it forming a higher low as price formed a lower low. Another positive divergence.

With central banks around the world easing monetary supply, expectations are for commodities and other cyclicals to do much better in future. Wilmar seems like a logical beneficiary.

I would pay attention to the declining 50dMA. At $3.32, it is just 8c away from today's closing price of $3.24. If it should be overcome on high volume, it would attract more buyers and force more shortists to close their positions. Then, we could see price going higher to test the support turned resistance at $3.52.


Wilmar said on Thursday it had repurchased 7.4 million shares from the open market, representing 0.115% of outstanding shares, at $3.00 each.

“The buyback is because Wilmar is good value at these prices. It also reflects the confidence that the Wilmar board has in the long term fundamentals and growth prospects of the group,” Wilmar’s spokeswoman said in an email.



B said...

Congrats on getting it spot on :)

It's always nice to have cash in hand to pounce on any opportunities that you see straight away. I believe your dividend income alone can achieve that :)


AK71 said...

CIMB expects Wilmar to post stronger qoq earnings as its palm and laurics segment benefit from the expanded refining capacities in Indonesia. This will be supplemented by sugar contributions from Sucrogen which are captured in 2H during the harvesting season.

Consumer products division are expected to report higher sales in 3Q due to Mid-Autumn festivals and better margins due to lower feedstock costs. But this will be partially offset by the challenging operating environment faced by its oilseeds and grains division due to overcapacity. The good news is that the back-to-back crushing margins in China appear to be improving.

AK71 said...

Hi B,

Thank you but I am sure I was lucky too. :)

Having a steady stream of passive income is not just comforting during market downturns, it fills up our war chests which, as you have put it so well, allow us to pounce on opportunities.

Ah John said...

hi AK, share an article here.
As US starts to print money again, interest rate will keep low till 2014, so REITs should continue performance well. What's your view about this and other stocks besides REITs?

AK71 said...

Hi Ah John,

If I am not mistaken, Mr. Bernanke says that interest rate will be kept at near zero until mid-2015. This is good news for all leveraged products including REITs. It is also good news for cyclicals such as commodities and real estate related stocks. :)

Ray said...

Congrats AK!
Took alot of guts to buy when it dip below $3.

So is your Wilmar investment looking much better now? i.e. recouped most of your losses?

AK71 said...

Hi Ray,

My strategy is to divest gradually at resistance, as usual. I can only hope it turns out well.

Unlike my long position in China Minzhong which is now very much in the black, I have been a bit more conservative in adding to my long position in Wilmar as its share price declined. So, my average price for Wilmar is still relatively high. Overall, still in the red.

AK71 said...

Wilmar will contribute its China infrastructure, supply chain and distribution network, while Kellogg brings a portfolio of globally recognised brands and products.

How important the deal will be to Wilmar is “anybody’s guess,” says Carey Wong, an analyst at OCBC. “No mention of numbers, no mention of when it’s going to start,” he notes. But he adds, “that could provide some way for them to monetise their extensive distribution network, but the impact is still unknown.”

He notes the press release said the China snack food market will hit US$12 billion ($14.7 billion) by end-year, “but it doesn’t look like Kellogg is in China in a big way yet.” He adds, “definitely, it’s a pretty competitive market.”

Dow Jones & Co, Inc
Tuesday, 25 September 2012

AK71 said...

Wilmar’s JV with Kellogg is a move to tap opportunities in the packaged and processed food segments before China fully matures, recycling Wilmar’s market and network strength from primary foods, Citigroup says.

It notes these were the “supporting thoughts” on Wilmar taking a 10% stake in Australian consumer-brand-maker Goodman Fielder earlier this year. The house notes Wilmar’s consumer segment is among the smallest of its five divisions, contributing only 4%-12% of pretax earnings.

“While contributions from this JV will take time, growth at its consumer division will help reduce the earnings volatility at Wilmar, especially as processed foods unlike primary foods are less impacted by government anti-inflation policies. There is good growth headroom for the JV as Kellogg-Wilmar believes that sales in cereals/snacks alone in China is estimated at US$12 billion (or $14.7 billion versus US$6.8 billion for Wilmar’s consumer packs last year).”

Citigroup rates Wilmar at Buy with a $4.08 target.

Dow Jones & Co, Inc
Tuesday, 25 September 2012

AK71 said...

CPO futures’ sharp drop is a negative surprise, CIMB says. “We had expected support for CPO price given its current attractive discount to soybean oil.”

The decline may be partly on soybean oil’s and crude oil’s recent weakness, but a big part may be on speculative CPO selling on concerns over sustained weak demand on weaker global growth, higher oilseed-crushing activities and lower biodiesel demand, leading to inventories’ sharp build-up, it says.

Market players may be taking cues from downbeat views at a conference, with speakers predicting a 4Q12 CPO price fall to MYR2,600/ton ($1,040/ton), with the most bearish tipping prices as low as MYR2,285/ton, it notes. But CIMB expects Malaysian palm-oil inventories will peak in October, with demand picking up by year-end and CPO prices to recover to around MYR2,800-MYR3,000/ton by year-end.

Dow Jones & Co, Inc
Tuesday, 25 September 2012

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