Olam

Olam: Olam’s 1QFY15 results were below estimates. Net profit fell 2.9% to $44.3m, while revenue inched down 0.5% to $4.3b, weighed by a 9.2% drop in sales from the non-food category; revenue from the food category was up 1.8% to $3.5b. Overall sales volume declined 14.6% to 3.1m MT, although this was offset by a 16.5% rise in overall average selling prices (ASP). The volume decline was due to a combination of volume growth across prioritised platforms and a reduction in volume from lower margin businesses that were discontinued / restructured. Sales revenue was flat due to an increase in commodity prices particularly in the Confectionery & Beverage ingredients and Edible Nuts, Spices & Vegetable Ingredients segments. EBITDA margins for the group slipped to 5.1% (from 5.8% a year ago), mainly driven by adverse price movements in the hazelnuts and dairy businesses, coupled with execution challenges in upstream dairy. Excluding the impact from these businesses, overall EBITDA would have been higher. On its cash flow metrics, Free cash flow to firm was lower at negative $54.6m (1Q14: +$46m, due to higher net working capital of $117.1 (1Q14: $44.5). The change in working capital was driven by a significant increase in commodity prices. Net gearing was relatively stable at 1.85x, in line with the group’s FY16 target of below 2.0x. Going forward, management guides that the long-term trends in the agri-commodity sector remain attractive, and Olam is well-positioned to benefit from this given its core global supply chain business. The group believes that its diversified portfolio with leadership positions in many segments provides a resilient platform to navigate uncertainties in global markets. At the current price, Olam trades at 1.3x P/B and 13.9x forward P/E. Olam’s 1QFY15 segmental performance: - Edible Nuts, Spices & Vegetable Ingredients division: Revenue of $837.0m (+10%), sales volume of 454,500 MT (flat y/y) and EBITDA of $77.8m (-22%). The almonds, peanuts and US vegetable businesses continued to perform well and the cashew and tomato businesses recorded improved performance. Segment’s overall performance was impacted by the hazelnut business in Turkey and to a smaller extent the spices business in Vietnam. - Confectionery & Beverage Ingredients division: Revenue of $1.2b (+32%), sales volume of 306,600 MT (-3%) and EBITDA of $53.8m (flat y/y), led by higher commodity prices in 1Q15. Despite lower volumes, increased contribution from midstream processing assets helped to maintain EBITDA during the quarter. - Food Staples & Packaged Foods division: Revenue of $1.4b (-18%), sales volume of 2.0m MT (-22%) and EBITDA of $68.9m (-21%). Weak performance was due to the sale of the 80.0% stake in the Australian grains business and the closure of the grains desk in South Africa. EBITDA declined due to the impact of discontinued operations in grains and the underperformance of the Uruguay dairy farming operations. - Industrial Raw Materials division: Revenue of $843.3m (-9.1%), sales volume of 401,000 MT (+8.2%) and EBITDA of $15.4m (-8.3%), with lower revenue dragged by lower prices and a change in business mix. EBITDA declined as higher contribution from cotton and wood products was offset by weaker results from rubber and fertiliser. - The Commodity Financial Services swung into an EBITDA profit of $3.4m in 1QFY15 from a $8.3m loss in 1QFY14, as the market-making, risk management solutions divisions and the fund management business performed better post their restructuring.