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Olam Rides Wave Of Commodities Boom
Corporate Digest | 02 July 2010
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By: Xavier Lim
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By: Isaac Chee
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China’s central bank recently announced on 19 June that it would abandon the policy of pegging the renminbi at 6.83 to the dollar, a level held since July 2008. The new system confers greater flexibility to the renminbi, with CLSA forecasting a 5% annualized increase against the greenback.

The central bank’s announcement has also caused an immediate impact in the commodity markets. As the world’s largest importer of iron ore and soybeans, a revaluation of the renminbi would boost the purchasing power of the Chinese. Global investors are anticipating an increase in commodity prices when imports to China become more affordable, leading to a demand spike which supply cannot meet, at least in the short run.

Positioned For Supply Crunch
This might serve as an indicator for Olam International (Olam) to make hay while the sun shines. A leading global supply chain manager and processor of agricultural products, Olam is well placed to plug this global supply gap. With a strong core business of a supply chain, along with distribution channels exporting 20 agricultural products into 64 countries, Olam is and will be a key player in influencing commodity prices.

Having strengthened its balance sheet by selling a 13.8% stake to Temasek Holdings last June for $437 million, Olam has used this capital to extend its global market share through strategic acquisitions. Earlier in May 2010, it spent US$2.9 million to increase its stake in New Zealand Farming Systems Uruguay to 18.35%, a large scale diary-farming operations firm in Uruguay. Barely a month later, it acquired the dehydrated and vegetable products business of Gilroy Foods & Flavors for another US$250 million, one of North America’s largest processors of vegetable products. These have given Olam inroads into both the North and South American markets.

Robust 9M10

Olam has seen revenue growth in all its business segments. Sales volume for Olam’s Edible Nuts, Spices & Beans segment grew 24.3%, while revenue increased 25.9% in 9M10. Net Contribution (NC) increased by 33.5% to $130.3m from $97.6m. Olam also managed to secure its first pre-cleaning outsourcing contract from a large roaster, for its new cashew pre-clean line in the US. In addition, its 12,000 hectares of peanuts in Argentina are developing well given favorable growing conditions during the third quarter.

Its Confectionery & Beverage Ingredients segment reported a 5% increase in sales volume and a 14.4% increase in revenue in 9M10, while NC rose by 18.9%. The marginal volume growth in this segment was due to the short crops in cocoa in Ivory Coast and coffee in Colombia. Nevertheless, cocoa prices have once again increased to their highs.

On the back of strong performances from the Rice, Sugar, Dairy, Grains, Palm and Packaged Food Business during the third quarter, Olam’s Food Staples & Packaged Foods segment’s sales volume and revenue increased by 26.5% and 22.2% respectively in 9M10.

Olam has also increased its cotton’s market share after the exit of certain key suppliers during the recent financial crisis. In addition, cotton prices rallied to over US$0.85 per pound during 3Q, the highest level seen for the last two years, caused by the revival of strong global demand for cotton coupled with India’s ban on cotton exports. This has helped its Industrial Raw Materials segment to report a 18% growth in sales volume for 9M10.

These contributions have helped Olam achieve its 19% and 30% increased top line and bottom line respectively in 9M10.

Promising Outlook

Interestingly, after a brutal correction in commodities which started at end 2008 and lasted into 2009, energy, food and base metals have since recovered significantly. Commodities such as white sugar have now hit record highs as hot money is chasing the direction of the commodities, also known as betting the trend. Moreover, industrialization and urbanization were barely impacted by the recent global downturn, and seem unlikely to be disrupted in the near future.

Furthermore, difficulties in producing commodities – including its heavy working capital requirements – create a likely future scenario where supplies of certain commodities will fall short of demand. According to Goldman Sachs, a severe supply constraint for commodity markets will arise at end 2010, forcing demand rationing through sharply higher prices – the exact place as they were in mid-2008 when agricultural prices hit historical peaks.

One may worry that when commodity prices surge too far up, a swing back will eventually occur just like every other Wall Street fad. Nevertheless, by taking advantage of the recent financial crisis by raising capital and making incisive acquisitions, Olam has emerged not just a yard ahead of its competitors, but in pole position to leverage on market share left behind by firms who exited the market during the financial crisis.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Olam Int'l  1.930 -- --   
Business: Co is engaged in sourcing, processing, packaging and merchandising agricultural products. [FY18 Turnover] Food staples & packaged foods (47.6%), confectionery & beverage ingredients (23.4%), industrial raw materials, infrastructure & logistics (14.9%), edible nuts & spices (14.1%).

Insight: May-19, 1Q19 revenue rose 16.7% due to increased t... Read More

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