The second largest SGX-listed company just got larger. Wilmar International announced on 5 July 2010 that it had acquired CSR’s sugar and renewable energy business, Sucrogen, for approximately A$1.75b. This was also 6% higher than the final offer made on 2 July by China’s Bright Food Group, a long time suitor.
Wilmar’s latest acquisition will be a platform to jumpstart its expansion in the sugar business. Sucrogen is the largest raw sugar producer in Australia and the second largest exporter of raw sugar in the world. The Queensland-based outfit is also the largest sugar refiner in Australia and New Zealand.
This will also help Wilmar maintain its high earnings growth, keeping shareholders interested in its long term prospects. The sprawling agribusiness saw its FY09 net profit increased 22.9% despite an 18% decline in revenue, mainly as a result of its hedging strategy protecting it from the sharp plunge in CPO prices during the period. And once the deal gets completed by September, analysts expect Sucrogen’s ongoing operations to boost Wilmar’s earnings by between 3-5% in the first year of consolidation.
Lucrative Indonesian Sugar Market
Wilmar with Sucrogen on board will have the necessary technical expertise to develop a recently offered 200,000ha land concession in Merauke, Indonesia. More importantly, this will give Wilmar access to the lucrative Indonesian sugar market which is suffering from a structural deficit.
Last year, Indonesia’s growing young population consumed 4.7m tonnes of sugar but produced only 2.8m tonnes, according to a report published in May by the International Sugar Organisation. With Indonesia’s economy poised for further growth, increasing affluence will drive demand for sugar higher, widening the deficit.
Coupled with protectionist agricultural policies, Indonesia’s domestic sugar prices have been and will continue to be much higher than those set internationally. For instance, under current Indonesian Trade Ministry regulations, only companies that also produce sugar are allowed to import it.
But the location of Wilmar’s future greenfield sugar cane plantations in Indonesia might unsettle some. While a 2.5 hours’ flight from Sucrogen’s operations base in Australia, Merauke is situated in the somewhat restive province of Papua. The Economist reported in June that workers for an American mining firm in Timika, more than 500km east of Merauke, had been harassed by Papuan independence activists since July last year.
Nonetheless, Wilmar’s Chairman and CEO Kuok Khoon Hong has said that “none of them (Sucrogen’s management) were frightened, in fact they were keen to go.”
Should things proceed smoothly with the development of the concession, the commodity giant should see its first harvest in 3 years’ time. Meanwhile, CIMB, which has a Neutral rating and target price of $6.50 on Wilmar, expects this to double sugar earnings contribution to the group in ten years’ time. Very sweet returns await shareholders who stay invested till then.
This content is contributed by Shares Investment. Shares Investment is an investment information provider since 1995, covering Singapore, Malaysia and China markets in print and digital media, seminars and data syndication | www.sharesinv.com.
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