Published June 2, 2009

Olam offers Temasek steady earnings stream

By CHEW XIANG

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JUST over four years ago, Temasek Holdings went through a Great Rebalancing. In March 2005, half of its assets were investments in Singapore; a further third was in OECD countries including Japan; and about a fifth in the rest of Asia.

It is a relatively small deal, but it is a symbolic one. It means the Great Rebalancing is under way again.

After a review, Temasek said its long term target was to have a third of its portfolio in each geographical region. It started selling off Singapore assets, while spending billions to acquire stakes in Asian companies (including $3 billion in the ill-fated Shin Corp deal), as well as banks and telcos abroad.

Among the assets the Singapore investment company divested then to fund its buying spree was a 4.86 per cent stake in Olam International. It got about $120 million - $1.57 a share - in March 2006 and likely made a big profit. Olam had listed at 62 cents the year before and Temasek, a shareholder since 2002, had probably gone in at a price far below the public launch price.

After what has happened in the past year, Temasek now has a new long term target. Last month, it said it wanted to focus more on Asia and emerging markets such as Brazil and Russia, with reduced emphasis on developed countries like the US and Europe. The new strategy was dubbed 10-20-30-40 - 10 per cent of its portfolio was to be allocated to Latin America, Russia and Africa; 20 per cent to OECD countries; 30 per cent to Singapore; and the remaining 40 per cent to the rest of Asia.

The rebalancing is not only geographical. Analysts say the appointment of former BHP Billiton boss Charles Goodyear as Temasek CEO from October could mark a shift in its investment strategy, away from financials and into commodities.

Yesterday, Olam said it would sell just under 14 per cent of the company to two Temasek subsidiaries for $437.5 million by issuing new shares. It is a relatively small deal, but it is a symbolic one. It means the Great Rebalancing is under way again.

Olam represents both a geographical and sectoral spreading of risk. If the deal goes through, Temasek will be the second largest shareholder of a commodities supplier which has a presence in all four of its targeted regions. As well, Olam's core focus - so-called soft commodities, or agriculture and food products - means earnings are likely to be less volatile compared with those of suppliers of commodities such as energy, minerals and metals - or even those of banks, shipping companies, airlines and other sectors to which Temasek has already big exposure.

That is a welcome diversification. Temasek reportedly lost $58 billion from end March to November last year. Just over half of that was in the value of Singapore-listed Temasek-linked companies. The rest were lost in unfortunate investments in financial institutions - reportedly US$3 billion alone from selling out of its Bank of America stake earlier this year.

But one problem with the rebalancing thesis is that the company is still very much a Singapore play and despite its significant international presence isn't much of a diversification from what Temasek already has. Its earnings may be stable but its shareholder returns correlate very closely to an index that Temasek is already heavily exposed to. Olam's beta coefficient against the Straits Times Index is 1.16 over the last year, and 1.23 since it was listed in 2005, according to Bloomberg data.

Despite this - and the wild stock market gyrations of the past nine months - Olam has still managed total returns of over 20 per cent since March 2006 - compared with minus 5.5 per cent for the STI. Olam will likely not be able to repeat for Temasek its impressive returns in its earlier years. It does not pay big dividends, while analysts' consensus target price for the next twelve months is around $1.72 a share, not far above the $1.60 Temasek will be paying for its stake if the deal is approved by shareholders. Yesterday, the stock closed at $2.16 - a rich 13.8 times historical earnings, and above the STI's 12.6x.

But what it can provide is a steady stream of visible and defensive earnings, married to a convincing consumption story. The world's middle class will continue to grow, and they will want more to eat and that will boost volumes and thus earnings for the likes of Olam.

The investor is long familiar with the company. Olam boss Sunny Verghese is chairman of IE Singapore; independent director Wong Heng Tew is also an advisory director of Temasek. It seems a fairly safe investment for Temasek to stomach.