Pick up a jar of peanut butter and look for an ingredient on the label called saturated fats. Now pick up a tub of margarine and look for the same ingredient.
But why stop there? Poke around the kitchen and you may find many other food products that we consume on a regular basis might also contain saturated or hydrogenated fats. These fats are primarily made from palm oil because it is relatively inexpensive. Apart from its uses in food processing, palm oil is also used as starting product for…
But why stop there? Poke around the kitchen and you may find many other food products that we consume on a regular basis might also contain saturated or hydrogenated fats. These fats are primarily made from palm oil because it is relatively inexpensive. Apart from its uses in food processing, palm oil is also used as starting product for biodiesel.
Once it’s gone, it’s gone
There are two things to note here. Firstly, palm oil is relatively cheap. But being a commodity, its price will necessarily fluctuate with demand. Secondly, and perhaps more importantly, it is a consumable. So, unlike commodities such as gold, silver, iron and other metals that are recoverable, once palm oil has been consumed… it’s gone.
Palm oil is big business. It is reckoned that we consume all the 50 million tonnes of palm oil produced every year. But palm oil is only one of many commodities that diversified farmer Olam International (SGX: O32) grows. Its other products include coffee, cocoa, various edible nuts and beans, which all have one thing in common – they are all consumables.
Interestingly, Olam started as a single-product company by growing cashew, which it exported from Nigeria. But it quickly grew into a multi-product conglomerate. The company identified obvious synergies with other agricultural commodities in terms their sourcing, storing and marketing, which it rapidly exploited to its advantage.
The clear synergies have allowed Olam to grow almost exponentially. Revenues have increased almost 10-fold from around S$2b in 2003 to over S$19b last year. Meanwhile, profits have jumped from S$24m to S$410m – a 17-fold increase over the same period.
But Olam doesn’t just make profits. It shares some of the profits with its shareholders in the form of dividends too. The maiden payout of $0.01 per share in 2005 grew to $0.04 last year.
Notably, the payout only represents a quarter of the company’s profits, which means that three quarters of its earnings is ploughed back into the business. It might also mean that there is room for the company to share more of its spoils with shareholders in the future.
Profit growth starts with a single seed
From an investor’s perspective, Olam is above-average in terms of how well it uses every dollar of shareholder capital. Its Return on Equity of 13% is higher than the 8% median for Singapore’s quoted agricultural industry. It has achieved this through leverage or by increasing the amount of money that it borrows.
Of course, increasing borrowings may also expose shareholders to greater risks. But it can also magnify the company’s efficiency. And when the borrowing are used to plants assets that could have a useful life of 20 or 30 years, taking on long-term debt doesn’t seem that bad.
That concludes the Bull argument. You can read the bear argument here.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.