Accumulating Wilmar on price weakness.

When I revealed my top investments earlier this year (read related post #2 at the end of the blog), some were surprised that I had a relatively large investment in Wilmar International which isn't a typical investment for income.

Of course, long time readers of ASSI would know that not all investments in my portfolio are for income although almost all lean in that direction.




Why Wilmar?

There are not many companies in the world like Wilmar when it comes to agricultural products and their distribution. 

Wilmar has amazing breadth and depth of operations. 

Its distribution network is extensive, established and still growing. 

It is a truly impressive business entity.

Potential investors should note that Wilmar is still a growth story and there continues to be quite a lot of CAPEX. 

This will continue to impact its earnings for some time to come.

In the meantime, however, they are profitable and they do pay dividends.

Since I am quite happy to be paid while I wait to benefit from their future growth, the recent decline in Wilmar's share price is an opportunity for me to accumulate.

Similar to my investment thesis for BreadTalk, I believe that when the CAPEX at Wilmar tapers off which they one day would, Wilmar's fantastic scope and scale of business would send its earnings soaring.

And while BreadTalk's extremely high PE ratio was rather unpalatable at the time when I became an investor (read related post #1 at the end of the blog), although not strictly comparable, Wilmar is currently trading at a much lower PE ratio of about 15x.

To put this in perspective, at its highest, Wilmar closed at S$7.11 a share in January 2010. 

Based on the full year earnings per share in 2009, it represented a PE ratio of above 20x.

It is important to point out that, in 2010, Wilmar's NAV per share was about 22% lower than what it is today. 

Paying S$7.11 a share then would have been a huge premium to NAV (US$1.85 per share) back then. 

Comparatively, there is more value backing each share in Wilmar today. 

This is an important distinction to make. 

Wilmar is a more valuable business entity today than it was in 2010.

Paying $3.30 a share is relatively inexpensive as I am paying a relatively small 2% premium to NAV (US$2.38 per share). US$1.00 = S$1.36.

I am also paying a lower price than what Archer Daniels Midland Co paid about a year ago to hike its stake in Wilmar from 20% to 22%, paying S$3.38 a share. (Reference: Reuters.)

Having said this, Wilmar's share price is currently in a downtrend and it could decline further and, if that should happen, I will be quite happy to accumulate again.

Finally, investors in Wilmar must be of the patient variety. 

When CAPEX tapers off, that is when Wilmar will be able to pay more generous dividends. 

Patience, I believe, will be rewarded.

See Wilmar's AR: HERE.

Related posts:

1. Investing in BreadTalk.
2. My investment portfolio.

2016 full year passive income from non-REITs (Part 1).

During an "Evening with AK and friends", someone asked if I was going to sell my stocks as market guru Hu Li Yang was expecting a stock market crash. I said we should stay invested as the market was still awashed in liquidity and money will go to where it is treated best. See: Evening with AK and friends.



So, what did I do in 2H 2016 in the non-REITs space? I made various purchases but, mostly, I was buying DBS shares. Besides DBS, I also bought some shares of OUE Limited, PREH, Wilmar, OCBC, Breadtalk and Starhub.

(I am impressed by DBS' cost management. Their cost to income ratio keeps declining.)

The narrative for investing in OCBC was similar to the one for DBS. Although all three local banks' stocks looked cheap to me, my preference was for DBS because of the perceived cheaper valuation.


The reason for me putting some money in OCBC's stock was mostly because my long position in DBS grew so big (and I do mean BIG) that it was prudent for me to step on the brakes. 




Using a strategy I employ frequently for stocks which I am highly confident in, my relatively large position in DBS included both a core position for income as well as a trading position.

Why not UOB? 


Well, I think UOB has been a bit laid back. I am not saying that it is a bad thing, mind you, but its growth story seems less exciting.

Of course, some might say that DBS and OCBC have been more "adventurous" but I like to think that they are more enterprising.

I feel that growing their wealth management business more aggressively will continue to set them apart from UOB as that business contributes more and more to their earnings.

Next, Wilmar. I continue to like Wilmar's business strategy and their very impressive scale of operations. It is an amazingly complex business and, to be quite honest, I have no way to analyse most of its operations.

However, when Mr. Kuok thinks their shares are cheap and bought more at $3.00 a share, that was a pretty clear signal to me. At that price, we would also be buying at around its NAV which seems conservative.

Source: RHB.

Having accumulated a rather significant long position in Wilmar in recent years, I am quite happy to wait while being paid to do so.

Now, for OUE Limited. I blogged about my rationale for increasing exposure to OUE Limited when I shared my numbers for 1H 2016 (see related post #1). Back then, I added at $1.51 a share. In 2H 2016, I added more at $1.53 a share.

Twin Peaks.

My decision to increase exposure was mostly driven by the even larger discount to NAV from the time I initiated a long position. 

There is much value in OUE Limited but waiting for value to be unlocked requires a lot of patience. Well, remember, a wise man did say before that the big money is in the waiting.

Along similar line of reasoning, I also added to my investment in PREH at 80c a share a few days ago. This is the lowest price I have ever paid for PREH. The last time I bought any PREH shares was more than a year ago. 

It is interesting to me that Mr. Ron Sim, Mr. Pua S.G. and Mr. Kuok K.H. have been increasing their stakes in PREH on price weakness. 

PREH is an asset play but it is also a growth story. It is not for the faint hearted.

PREH

As for Breadtalk, I have a more recent blog post on my decision to initiate a position. I compared it to Old Chang Kee and QAF Limited, both of which I have been a shareholder of for many years. 

If you are interested to know why I had a change of heart and decided to initiate a smallish long position in Breadtalk, go to the related posts at the end of this blog post (see related post #2).

Starhub. In June last year, when I did a technical analysis for Starhub, I said:

"The widening of the Bollinger Bands indicates increased volatility. The OBV shows selling pressure. The MACD is declining and shows no sign of a positive divergence. These are all on the weekly chart which suggests that continuing weakness in the longer term should not surprise us." Read blog post: here.


We saw Starhub's stock price sinking and I nibbled  again in late November. I feel that Mr. Market is right to be concerned but might be overly pessimistic about Starhub's prospects with the introduction of a 4th telco.

There is plenty of speculation now but, to be realistic, it will take time for the new entrant (which is expected to enter the market in 2018) to gain traction and it remains to be seen how successful it will be.




Back in June 2015, I also said that SPH and Starhub were similar:

"They could see earnings come under pressure for different reasons but that makes them similar too as the challenges are very real.... I would like to have some buffer in terms of dividend yield buying into SPH and Starhub because I am investing in them primarily for income and not growth." Read blog post: here.

I believe I am getting a much thicker cushion buying Starhub at under $2.80 a share and that was what I did.

As for SPH, let me share here a recent conversation with a reader:

I have been a SPH shareholder for many years and I am happy enough to be paid while I wait.
---------------------
As this turned out to be a very long blog post, I chopped it up into two parts. Read Part 2: HERE.
Related posts:

1. 1H 2016 income from non-REITs.

2. Breadtalk, OCK and QAF.

3. Made $1m investing for income.
4. 2016 FY income from S-REITs.

Breadtalk, Old Chang Kee and QAF Limited.

I avoided buying Breadtalk's stock for a long time, probably for as long as I avoided buying their bread and I definitely have never bought their "fresh" soya bean milk before. All so expensive.

Yes, I know. AK is very giamsiap. Terrible!





A very high PE ratio and gearing makes the stock unpalatable. 

To make it even less attractive, the dividend is peanuts. 

Give shareholders only enough money to buy some bread, maybe.

However, I revealed that I nibbled at Breadtalk on price weakness during the last "Evening with AK and friends". Why har?





Reader:
Sir, there is one thing that puzzled me. You mentioned that you bought Breadtalk, but this seems contrary to certain principles which you always talk about. 

For example, the stock doesn't seem cheap, seeing that the PE of 44 is near its 5-year high. 

Second, the stock doesn't give very high dividends (you already explained this point). 

It is the first point that puzzles me, since you have always talked about buying an asset when it is cheap. How come this time it is different leh?





Assi AK:
If cash flow from ops is strong and CAPEX reduces, earnings will improve.

BT has strong CF... CAPEX needs to come down and if/when it does, earnings will go up and PER will improve. 

They could pay better dividend then. 

Not for the pure income investor.

Tsk, tsk...

Not for the purist income investor, to be sure, it is a smallish long position for me.

Consistent with my philosophy (remember "the pyramid") and to put things in perspective, it accounts for less than 1% of my portfolio.

Related posts:
1. Old Chang Kee versus Breadtalk
(Why AK prefers OCK to Breadtalk?)
2. QAF Limited.
(If you like bread, QAF is yummier!)
3. Bought cheaper bread on BREXIT!
(AK bought more at $1.03 a share.)