The poor performance of commodity traders on Singapore Exchange (SGX) has baffled investors. Corn and wheat are at the highest levels since 2012. The Bloomberg Commodity Index is up 24% year-to-date. Western commodity traders such as Glencore, Bunge and Archer-Daniels-Midland are soaring.
But, Olam Group and Wilmar International, two of the SGX-listed commodity traders, are floundering. They are down in a food price spike.
This is odd. Olam and Wilmar were winners in previous commodity bull runs. In the 2006-08, Wilmar quadrupled in value. Olam more than doubled. These companies are processors that trade in the stock market like producers.
Guilt by association may be at the heart of the issue. The stench of a long-forgotten scandal may be the cause. The bitter memory of the collapse of Noble Group in 2017 looms large in investors’ minds.
Commodity super-cycle
Stockbrokers like clever acronyms. A decade ago, investors in Singapore were energised by the NOW sector. This referred to Singapore’s commodity traders — Noble, Olam and Wilmar.
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The world was in the throes of a commodity super-cycle. These companies act like DHL or FedEx Corp for commodities. They were middlemen matching the sellers and buyers of coal, palm oil and cashews.
Many fund managers felt inspired to own the NOW sector. All three companies were in global expansion mode. They were looking to buy hard assets to boost their trading. Noble was buying processing assets like soybean-crushing plants in Argentina. Wilmar had cornered most of Indonesia’s palm processing capacity.
Noble was the most favoured of the three. It had been resilient in the 2008 financial crisis. It had managed the counterparty risk that shook the world. The company was cash-rich and had low debt. Its cash cycle was just 14 days, which was a tenth of Olam’s.
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Richard Elman, Noble’s founder, was a symbol of Western enterprise in the East. The Englishman had named the company after Noble House, a fictional trading house in Hong Kong. Elman had created a giant trader from modest origins as a middleman in Hong Kong in the 1960s. He initially supplied Chinese steelmakers with iron ore.
The young Elman had excelled at sourcing iron ore in China. This was long before the WhatsApp era. In fact, faxes were not in use. Information about supply was hard to come by. Elman was able to source supply for the Chinese steelmakers. He became a vital cog between the Far East and the rest of the world.
In 2010, Noble was a sprawling player with Brazilian sugar mills, Australian mines and American fuel terminals. It was then a mammoth with a market capitalisation of US$5 billion. Noble’s revenue was US$100 billion, making it one of the 100 largest corporations in the world and Asia’s largest commodity trader.
Like Olam and Wilmar, Noble’s stock flourished in the last commodity bull run. Noble’s operating earnings rose two-fold in FY2010 ended December 2010. The stock doubled over the next five years. It outperformed the S&P GSCI (Goldman Sachs Commodity Index) by 83%.
Hit by Iceberg
In February 2015, a short-seller called Iceberg Research published damning allegations against Noble. There were questions raised about the accounting and disclosure. Noble lost 98% of its value in just over two years. The company stared at bankruptcy and its listing has been suspended. Investigations have dragged on for years. In April, the Monetary Authority of Singapore said a conclusion can be expected in 3Q this year.
The two remaining members of the NOW sector may be suffering by association. Since the last commodity bull run, Wilmar has expanded. Adani Wilmar, its joint venture with Indian conglomerate Adani Group, is the top vegetable oil producer in India. Its refining capacity of 2,500 tonnes a day is enough to supply more than half of India’s consumption. Both its Indian and Chinese edible oil operations are listed separately. The Singapore-listed parent may be trading at a discount of at least 35% to its subsidiaries.
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Olam has also raised its profile. Its balance sheet has been bolstered by investments from Mitsubishi Corp. There's another investment from a Saudi fund pending which is expected to close by end of the year. This means that its debt levels are lower than during the previous food spike.
The clincher in the case for the two are their payout levels. These companies have traditionally been tight-fisted. Today, they are paying out handsomely. Olam’s yield is 6% and Wilmar’s is 4%, among the highest on SGX. Investors may ignore these giants at their peril.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column
Correction note: An earlier reference was made to Marubeni, It should be Mitsubishi Corp. The investment from the Saudi fund, while announced, is only expected for completion by end of the year.
