Ever heard of Robert Kuok? He’s worth $19.4bn, which makes him the second richest man in Southeast Asia. He controls the extravagant Shangri-La hotel chain, the South China Morning Post in Hong Kong, and a shipping and property portfolio that stretches from Sydney to Paris. Born in Johor Bharu, Malaysia, he made his money from trading sugar and earned the cool epithet the ‘sugar king’.
Why should you care about a sugar billionaire? Well, he also owns the world’s biggest processor of palm oil… and his Singapore-based agriculture company is a great example of what I want to talk to you about today – Asia’s blooming relationship with Africa.
Africa is the last ‘white spot’ on the global investment map. There’s plenty of growth to be found there. According to the World Bank, economic growth in sub-Saharan Africa is set to outpace the global average over the next three years. But growth will not happen by itself. With the eurozone focused on resolving their own problems, I believe it is the Asian entrepreneurs like Robert Kuok and cash-rich corporations that will help to kick start Africa. Together they make a powerful story.
A year ago I called Myanmar “the biggest emerging market story” and mentioned a couple of stocks that could benefit. Like Africa, Myanmar is rich in natural resources. And after decades of neglect from foreign investors, trade and investment have both picked up. GDP growth is expected to reach 6.3% in fiscal year 2012-13.
Wilmar & the Sugar King
Mr Kuok’s palm oil and sugar producer is listed in Singapore and called Wilmar International Ltd (Wilmar). In a Chinese language interview he summarised his views on sugar with the following observation:
“Sugar is a basic food necessity besides rice and wheat, thus it is very important. If a child cries at night, you just need to give him/her a sweet and they won’t cry anymore. That’s why I see the potential to invest in this business.”
I have worked for one of his companies, and I assure you that the man has a formidable reputation. Many leading business people in the region learned their trade in his companies. He was one of the first investors in China following Mao Zedong’s communist revolution. So when this man does a deal in Africa, we should all sit up and take note…
A week ago, Wilmar acquired a 27.5% stake in Cosumar, a firm listed on the Casablanca Stock Exchange, for a total consideration of 2.3bn Malaysian dollars (US$263m). In conjunction, a stake of 26.5% in Cosumar will be purchased by a group of Moroccan institutional investors, who, with the support of Wilmar, will control a strategic 54% stake. The seller is a holding company – Société Nationale d’Investissement – owned by the Morroccan royal family.
The acquisition price is a 30% premium to the last trading price, and Morgan Stanley calculates it is equivalent to a price/earnings ratio of 11 times 2012 earnings, and 2.4 times book value.
What’s the rationale behind this move?
Well, Wilmar will secure a strategic and strong presence in Africa with the potential to sell sugar to markets such as southern Europe and north and west Africa. Cosumar is the only sugar supplier in Morocco and the third largest sugar producer in Africa. It operates seven beet and cane sugar mills with a total capacity of 1.6 million tonnes and works with about 80,000 farmers to secure its feedstock, according to JP Morgan.
Interestingly, this acquisition is taking place when sugar prices are at a three-year low (17.97 US cents per pound). Last time Wilmar made a sugar acquisition was in July 2010, when it acquired the Australian Sucrogen for 17 times historical earnings. At that time, the sugar price was about the same as now.
What can we learn from Wilmar’s move into Africa?
I think it is fair to draw three precious conclusions.
Firstly, it provides valuable information about the sugar price. When the ‘Sugar King’ makes two acquisitions around the current level it indicates that he probably thinks there is more upside than downside. It is also worth noting that after his acquisition in 2010, the price of sugar soared almost 100% (35 US cents per pound) briefly before gradually falling to its current level.
Secondly, it offers an insight about the stock price. Wilmar is trading on a prospective price/earnings ratio of of 12.3 times 2013 earnings compared with its five-year trading band of 9.9 to 23.1 times (average 16.7 times). This is probably justified given the weak price of sugar and palm oil, which is also trading at a three year low. However, what is thrilling is that the slide of these two soft commodities has been going on for some time, hinting strongly that analysts are likely to have made some very bearish assumptions in their earnings forecasts. So it could be an opportune time to buy the stock.
Thirdly, it offers a unique insight into how a leading private Asian investor perceives investment opportunities in Africa. In the past we featured a government company – PTTEP Exploration (PTTEP) – that invested in a brownfield project which has a much longer gestation. The new Wilmar African investment signals that Mr Kuok thinks that the continent is ‘investable’ as long as the price is right.
I believe we will see plenty more Asia and Africa deals coming through over the next few years. This is something that investors will warm to because it will allow Asian companies an additional growth engine. But it will also provide African firms access to capital and technology at a competitive price, which ought to help the continent to unleash its true growth potential.
I’ve uncovered another great play on the Africa boom in Profit Hunter. It’s an Asian company that’s profiting from close links between the two continents. For more info, click here.
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