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Olam Makes Headway On Strategic Initiatives

Olam International Limited (SGX: O32), a leading agri-business with operations across the value chain of the industry in 65 countries, announced its second quarter results for its financial year 2014 (FY2014) last Friday, showing significant progress on the execution of its strategic plan.

Olam, listed as a component stock in Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI), is an international integrated supply chain manager and processor of both raw and processed agricultural commodities across 16 platforms in 65 countries. It operates in 5 segments as follows:  Edible Nuts, Spices & Beans; Confectionary & Beverage Ingredients; Food Staples & Packaged Foods; Industrial Raw Materials; and Commodity Financial Services (the provision of insurance-related services).

Financial highlights

For the three months ended 31 Dec 2013, Olam’s sales volume by million metric tons (MMT) dipped 9.8% year-on-year from 4.09 MMT to 3.69 MMT, leading to a decrease of 8% in sales revenue from S$4.90 billion to S$4.51 billion. The lower volume was a result of a high volume base in the previous year and the lower revenues experienced came as a result of the lower sales volumes and softer commodity prices.

Meanwhile, PATMI (Profit after tax, minority interest) for the quarter declined 12.5% year-on-year to S$134.9 million and operational PATMI for Q2 FY2014 declined by a lower rate of 5.2% to S$129.0 million. The lower PATMI was partly due to profits from exceptional items (i.e. one-off gains) being much higher in the corresponding period a year ago; for FY2013, there were exceptional items consisting of a S$27.8 million gain less taxes of S$9.7 million coming from the sale of almond assets in the USA while a one-time gain of ‘only’ S$5.9 million was logged for the sale of the Dirranbandi gin in Australia in the current financial year.

Slashing capital expenditures

It has been quite a while since Muddy Waters’ “assault” on Olam started in Nov 2012. The short-seller had  highlighted some areas where it saw problems, including Olam’s dangerously high capital expenditures (Capex), lofty debt levels, and inflated earnings due to re-valuation of biological assets. After the fearful incident in which Olam’s shares fell by more than 30% from S$2.13 back in August 2012 to a low of S$1.395 in Dec 2012, CEO and managing director Sunny Verghese has carved out a plan to get things straight with four priorities:

1. Accelerate free cash flow generation

2. Reduce gearing

3. Reduce complexity

4. Facilitate better understanding of Olam’s business

Olam has been making steady progress on these fronts. It has significantly slowed down its pace of expansion by cutting capital expenditures from S$470 million in the first half of financial year 2013 to S$262 million in the first half of the current financial year. Several measures have also been taken to improve the company’s balance sheet, including sale of assets, bond buybacks and reduction of overhead expenses stemming from the acquisition spree taken place over the past years.

In the twelve months between Dec 2012 and Dec 2013, five strategic initiatives have been announced and completed  to increase Olam’s profits by S$36.1 million and boost its cash flow by S$134.1 million. In the next two quarters of FY2014, the divestment of other assets and repurchase of bonds is expected to contribute S$39.8 million and S$312.4 million to Olam’s profits and cash flow respectively.

All told, Olam has showed significant improvements across different measures in the first half of FY2014 as compared to the corresponding period a year ago. Cash outflows from the company’s operating activities decreased from S$519 million to S$271 million, fixed capital investments were nearly halved to S$262.4 million, and continued execution of its strategic initiatives have been implemented to unlock value and release cash.

The company’s net gearing ( net debt over equity) also eased to 2.06 times as of 31 Dec 2013, compared to a net gearing of 2.21 times a year ago. The reduction in gearing also signals Olam’s ample liquidity to cover all repayment and Capex obligations.

Verghese commented on the quarter’s results: “We are pleased with the progress made in the first half of FY2014, both in terms of operating performance as well as execution against our four strategic priorities and six key pathways identified in our strategic plan. This is reflected in the EBITDA growth and improved cash flow generation for the period.

He continued, “We will continue to work on all these pathways to achieve our twin goals of pursuing profitable growth and generating positive free cash flow on a sustained basis.”

Valuation

At Olam’s current share price of S$1.61, the company is trading at 11.4 times trailing earnings and sports a dividend yield of 2.5%.

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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 contributor James Yeo doesn’t own shares in any companies mentioned.