Published August 28, 2009

Olam's Q4 net profit falls 28% to $46.7m

Firm to enter new businesses; raises US$640m to grow, refinance debt

By EMILYN YAP

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IN SEARCH of higher margins, agriculture supply chain manager Olam International will be expanding its presence in the commodity finance, packaged food and fertiliser businesses.

The company has raised US$640 million to support growth and refinance debt. It announced the various developments yesterday as it posted a fourth-quarter drop in net profit.

For the quarter ended June 30, Olam's net profit fell 28 per cent from a year ago to $46.7 million. This was despite a 2.4 per cent rise in revenue to $2.44 billion.

The bottom line was hit by a one-off $10.8 million asset impairment, because of potentially reduced cotton production from an Australian subsidiary.

At a briefing yesterday, Olam managing director and CEO Sunny Verghese shared the company's new strategic plans - the next six financial years could see the group extending its reach either up or down the agriculture value chain and into more new businesses.

Olam will offer commodity financial services as one new business. This will involve options market-making, volatility arbitrage trading, risk management and fund management. The company hopes to launch several commodity funds and the first could start off this year with around US$50 million, said Mr Verghese.

Olam also aims to grow in the packaged foods business, mainly in Russia, South Africa and West Africa. Fertiliser distribution and possibly production is another area to look at, he added.

For some existing products such as coffee and edible nuts, Olam plans to establish leadership across the entire value chain. Acquisitions will support this growth, Mr Verghese said.

In a 'balanced' scenario, Olam expects the new strategic plans to bring its profit before tax margin from 2.2 per cent this year up to 4 per cent in 2015.

Olam has obtained more funds for expansion, capital expenditure, debt repayment and working capital needs. It received a US$540 million term loan facility from nine banks - split into a three-year loan of US$324 million and a five-year loan of US$216 million.

It also closed a 12-month US$100 million Islamic revolving trade finance facility.

For the full year ended June 30, Olam's net profit was $252 million, up 50.3 per cent from the same period last year. This included a one-off net gain of $69.8 million, and followed a 5.9 per cent hike in revenue to $8.59 billion.

The company declared a first and final dividend of 3.5 cents per share - one cent more than in FY2008.

Of Olam's four business segments, three - in edible nuts, spices and beans; confectionary and beverage and food staples and packaged food - did well in the year, registering higher net contribution (NC) per tonne. Demand for products in these segments was more recession resilient, Olam said.

Another segment in industrial raw materials such as cotton and wood products saw a slide in NC per tonne. Olam noted that demand for these commodities shrank sharply because of the economic slowdown.

Olam remains cautious about prospects despite seeing early signs of economic recovery. It expects 'trading conditions to remain difficult over the course of the second half of 2009'. The industrial raw materials segment in particular could 'underperform' until the economy picks up.

Olam shares ended yesterday nine cents higher at $2.57.