If you were to ask investment researcher, Muddy Waters what it thought about Olam International (SGX: O32), it could probably find lots to dislike about the company. It even once compared the Singapore-based commodity trader to failed energy company Enron.
But far from disappearing into the ether, the S$5b nuts and spices firm has seen its share price climb from a post-Muddy Waters low of S$1.40 to recent high of S$2.64.
The share price recovery has a lot to do with the support shown by a unit of Singapore’s state-owned Temasek investment company. That is the first thing to like about the Olam – a large investor prepared to take a long-term view in the company.
And so it should. Since its flotation on the Singapore market, Olam has delivered an annual total return of 12.5%.
Not too bad for a company that manages the supply chain of agricultural raw materials and food ingredients that include cashew nuts, coffee, rice, sugar and spices.
That is the second thing to like about Olam. It deals primarily in consumables. Or put another way, once its produce is eaten, then it’s gone.
Unfortunately, agricultural producers are also price takers. They have little or no control over the price of the commodities they deal in. When supplies are high and demand is low, then prices could fall.
Interestingly, though, Olam is able to maintain gross margins reasonably well.
That is the second thing to like about the company. It is able to control the amount of money it makes after deducting the cost of goods sold from the revenues it receives. The gross margins are not especially high. But enough for the company to post small but consistently positive bottom-line profits
The third thing to like about the company is its high Return on Equity (RoE), which is in the double-digits. A high RoE benefits shareholders because it is the profit that they make for every dollar of equity they have invested in the company.
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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.