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Olam International: The Best Performing Blue Chip in 2014

It can be instructive to look back at some of the market’s biggest movers in a certain period of time to get a feel of what has happened and what’s going to happen.

Over the past two-and-a-half months since the start of 2014, Olam International (SGX: O32), which engages in sourcing, processing, packaging, merchandising and exporting agricultural products, has been the best performing blue chip within the Straits Times Index (SGX: ^STI). Even as the latter has floundered with a 3% drop to 3,073 points from 3,167 points at the end of 2013, Olam has gained some 44.6% to S$2.22.

While short-term price movements can sometimes occur for befuddling reasons, Olam’s was clear – a consortium of Olam’s major shareholders have elected to acquire the company’s shares at a price of S$2.23 from other shareholders.

Olam’s shares had hit a post-Global Financial Crisis high of S$3.41 on November 2010 but had steadily declined to S$2.00 on 13 March 2014 before news of the voluntary offer for its shares broke through last Friday on 14 March 2014.

From its financial year ended 30 June 2010 to the last 12 months, Olam hasn’t been able to generate any positive free cash flow from its business as it spent heavily on capital expenditures while having negative or relatively small operating cash flows. In that period, its balance sheet had also remained heavily levered with net debt (total debt minus total cash) ranging from S$3.77 billion to S$7.88 billion. Along the way, attacks on the quality and viability of Olam’s business had also come from short-seller Muddy Waters – the investing firm had started criticising the company in Nov 2012. All of these likely added to the downward pressure on the company’s share price.

But despite the short-attacks and falling share price, the major shareholders of Olam, which include Temasek Holdings (one of the investment arms of Singapore’s government), still retain faith in its business. In the announcement made regarding the acquisition of the company’s shares, the consortium of investors, led by Temasek Holdings’ subsidiary, made known their wish to “provide Olam with a stronger long term shareholder base to support Olam’s strategy and growth plans over the medium to long term.”

While other shareholders might feel delighted to have the chance to sell Olam’s shares at a price higher than where it was prior to Muddy Waters’ short-attack, there’s also a case to be considered for the possibility of the company being worth more than the buy-out price of S$2.23.

Olam’s revenue has almost doubled from S$10.5 billion in the 12 months ended 30 June 2010 to S$20.0 billion today. At the same time however, its Price-to-Sales multiple has dropped from around 0.6 to 0.3 and part of the reason has been the company’s compression in its net profit margin from 3.4% to 1.7%.

In such an instance, shares of the company could have some upside to it should profit margins start to recover while sales continue picking up. But, that might take some hard work from Olam’s management as the company’s latest second quarter results showed an 8% year-on-year decline in half-yearly sales while profits dropped by 8.5%.

Currently, the consortium of investors interested in buying over the company’s shares has the intention to keep it going as a publicly-listed entity. This means that any potential improvements in Olam’s business in the future might just get reflected in a higher share price, benefitting shareholders who chose not to cash out. Of course, the company might also get forced to become a private entity depending on the amount of free-float that’s left after the acquisition exercise’s completed.

All told however, what an investor should be doing now is to compare his estimate of the true worth of Olam’s shares with the offer price of S$2.23 per share. When the comparison’s made, a conclusion of ‘What’s next?’ should then become clear. These are certainly interesting times for Olam’s shareholders.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.