Olam International Ltd’s Latest Earnings: What’s Next After A 92% Decline In Earnings?

Olam International Ltd (SGX: O32) released its fiscal first-quarter earnings (for the three months ended 31 March 2015) on Friday.

With operations in some 65 countries, Olam’s a global integrated commodity supply chain manager which engages in the sourcing, processing, packaging, and merchandising of agricultural products.

Some basic housekeeping and financial highlights

Earlier this January, Olam had announced that it was changing its fiscal year-end from June to December. As a result, the company’s current fiscal year, which started in 1 July 2014, will end on 31 December 2015 instead of 30 June 2015.

Under the old fiscal year, Olam’s results for the quarter ended 31 March 2015 would have been termed as for the fiscal third-quarter. But given the aforementioned change, the earnings will be for the fiscal first-quarter instead.

With that, let’s dig into the company’s latest financials.

For the  three months ended 31 March 2015, Olam’s revenue dropped by 10.7% year over year to SS$4.3 billion on the back of lower sales volume (more on this later) which was partially offset by higher market prices.

Meanwhile, Olam’s profit after tax and minority interest (PATMI) for the quarter sank by 92.1% from S$396.1 million a year ago to S$31.3 million. Olam had singled out two main culprits:

  1. In the same quarter a year ago, net exceptional gains of S$293.9 million were recorded by Olam due to the revaluation of its stake in a company, and the sale of almond assets in Australia.
  2. In the reporting quarter, Olam had reported a net exceptional loss of S$97.2 million mainly as a result of redeeming US$750 million worth of bonds that are due by 2018. The bonds were issued at 95% of their principal amount of US$750 million and were redeemed early at 103.375% of the principal amount.

On a brighter note, Olam’s Operational PATMI (which may be a better gauge of the company’s core business functions as it excludes exceptional items) for the quarter rose by 25.7% year over year to S$128.5 million largely due to underlying growth in most business segments.

Olam’s cash flow situation also saw some strong improvement. The company ended the fiscal first-quarter with S$21.6 million in operating cash flow, S$71.9 million in capital expenditures, and thus –S$50.2 million in free cash flow (free cash flow is obtained by subtracting capital expenditures from operating cash flow); a year ago, Olam had operating cash flow, capital expenditures, and free cash flow of –S$671.1 million, S$171.9 million, and –S$843.8 million, respectively.

Investors might also want to note that Olam’s balance sheet has improved from a year ago. As of 31 March 2015, the agribusiness outfit had a net debt to equity ratio (where net debt refers to total borrowings minus total cash) of 1.83, down from the selfsame figure of 2.03 seen in 31 March 2014.

Olam has a 2016 objective of having a balance sheet with a net debt to equity ratio of less than 2.0; with the latest figures we’ve seen, the company’s well on its way to meet that target.

Business highlights

The reporting quarter ended with Olam registering a 33.2% decline in sales volume to 2.683 million metric tonnes when pitted against the same quarter a year ago. Management explained that the lower volume is a result of Olam’s “deliberate strategy to grow in prioritized platforms while reducing volumes or exiting from lower-margin business.”

Olam had made a strategic plan announcement back in April 2013. Part of the plan involves the release of around S$1.5 billion in cash by 2016. Till date, the company has successfully completed 20 strategic plan initiatives which have collectively released S$966.1 million in cash.

A future outlook

In the earnings release, management had given a favourable outlook for its future prospects:

“The long-term trends in the agri-commodity sector remain attractive, and Olam is well-positioned to benefit from this as a core global supply chain business with selective integration into higher value upstream and mid/downstream segments. Olam believes its diversified portfolio with leadership positions in many segments provides a resilient platform to navigate uncertainties in global markets.”

While the big picture looks healthy, investors might still want to keep an eye on the progress in Olam’s revenue, profit, cash flow, and balance sheet to make sure the company is indeed taking advantage of the attractive trends it’s seeing.

Olam’s shares last changed hands at S$1.98. At that price, Olam is valued at 23 times its trailing earnings.

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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.