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Olam International Ltd’s Latest Earnings Update: Stable Results With Hints Of Improvement

Olam International Ltd (SGX: O32) reported its 2018 third-quarter earnings update yesterday morning. For context later, Olam is a major agri-business player that operates in 66 countries. It supplies cashew nuts, grains, and packaged foods across 18 platforms to 22,000 customers worldwide.

Here are some key takeaways from Olam’s latest earnings update:

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1. Olam’s revenue jumped by 23.6% from S$6.7 billion to S$8.3 billion for the quarter. This was contributed mainly by significantly higher volumes in the Food Staples & Packaged Foods division, which saw its revenue rise by 77.6% to S$4.3 billion. Lower revenues in the Edible Nuts, Spices and Vegetable Ingredients, and Confectionary and Beverage ingredients divisions provided some offset.

2. Despite the higher revenue, Olam’s net profit attributable to shareholders declined by 14.2% year on year to S$20.7 million. Reasons given were the down cycle in coffee (as some commodities are affected by seasonal factors), as well as lower contributions from the peanuts business and the Commodity Financial Services division.

3. The company ended the quarter with S$2.6 billion in cash and S$11.8 billion in total borrowings. Net gearing (net debt to equity) improved from 1.82 a year ago to 1.38 currently, as Olam incurred lower capital expenditures, raised cash from the sale of assets, and converted warrants into equity.

4. Olam’s operating cash flow for the reporting quarter was healthy at S$742.3 million, albeit lower than 2017’s third quarter which saw operating cash flow of S$956.2 million. With capital expenditure falling from S$237.5 million to S$139.2 million, free cash flow generated during 2018’s third quarter declined from S$718.7 million to S$603.1 million.

5. Olam saw sales volumes for its Edible Nuts, Spices and Vegetable Ingredients division fall by 11.1% year on year to 432,000 metric tonnes. The Confectionary and Beverage Ingredients division saw its volumes drop by 17.8% from a year ago  to 386,400 MT. However, the Food Staples & Packaged Foods division saw a big jump in volumes of 92.2% to 8.2 million MT.

6. In the first nine months of 2018, Olam made various acquisitions and sales of assets. Some of the acquisitions included a 30% interest in a Vietnamese cashew processor, a 100% interest in a Peruvian processor of quinoa and chia seeds, and a 100% stake in a Nigerian sourcing company which deals with crude vegetable oil and Olein.

7. Olam has a three-year strategic plan and is almost at the tail end of it, whereby six criteria (shown in the graphic below) are used for making key investment choices and for optimal capital allocation decisions.

Source: Olam 2018 third quarter management discussion and analysis section of earnings update

8. On its future outlook, Olam believes that its well-diversified portfolio would allow it to remain resilient in the face of global trade tensions, and its 2016-2018 Strategic Plan stands it in good stead to grow its business to ensure capital allocation decisions made are beneficial for the overall growth and stability of the group. Olam also has a focus on ensuring that its gestating businesses are able to reach their full potential.

In all, Olam has reported a stable set of results that contain hints of improvement in the form of better volumes and also higher revenues. As the company deals with commodities, there would naturally be seasonal movements in volumes, which would result in uneven revenue recognition through the year. But, Olam has implemented a good strategic plan to review and grow promising businesses, and its acquisition strategy could also complement its business by adding on volumes and additional product lines. The strategic plan should enable Olam to grow slowly and steadily over the long-term, barring any sharp dislocations in the commodities markets.

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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in Olam International Limited.

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing owns shares in Olam.