Olam sees prices and supply chain woes easing; geopolitical uncertainties persist
Olam Group expects commodity prices and supply chain disruptions to ease from the highs of previous years, although geopolitical uncertainties and volatile market conditions are likely to persist, says CEO Sunny Verghese in an earnings call.
Following its 2HFY2022 ended December 2022 results announcement, Verghese says Olam’s house view is that commodity price disinflation has taken place, although services disinflation is far stickier and is not going to “come down in a hurry”.
“One of the big issues for us between 2021 and 2022 was the accelerated pace of interest rate hikes to the highest we have seen in our history. We have been able to pass on most of it to the market — but not all, due to the lead-lag effect,” says Verghese.
In the case of its agribusiness unit Olam Agri, for example, the interest costs more than doubled from 2021 to 2022.
Next year, Olam is budgeting for higher interest rates, with the view that the US Federal Reserve will get to restrictive conditions ranging between 5.25% and 5.5%.
The company is also cautious about the growing fragmentation of global geopolitics and its potential impact on global food and feed trade flows. While food and feed is not under any sanctions today, it can change depending on the cause and trajectory of the war between Russia and Ukraine, says Verghese.
It is therefore important for Olam to be diversified. According to Verghese, the company has a rule to be present in at least 90% of the producing regions for all the key commodities it is involved in. As the company is not very asset-heavy — it minimises the assets carried on its balance sheet — it can be present in all the global trade flows in an “asset-light” way which gives it multi-source origination and multimodal flexibility.
“Our volume plan for next year assumes that the [grain shipping] corridors will still not be fully opened. Therefore, all the volume growth would be coming from the alternative producing countries, where we will increase our presence and market share. These volumes will make up for any shortfall given the uncertainty of the war trajectory. We were caught by surprise when the full-fledged war took place last year, but not in 2023 — we are quite comfortable,” says Verghese.
Commenting on China’s reopening, Verghese says that the impact of China lockdowns were felt mainly in the dairy and nuts business. He is hopeful that the reopening from January would lead to a resurrection of demand and appropriate price adjustments for the two products. That said, there are still a lot of inventory destocking happening in China currently — Verghese expects demand to start picking up in 2Q this year.
Big catalyst in partnership with Salic
As a group, Olam is optimistic on its agribusiness unit, expecting Olam Agri to deliver better y-o-y operating performance in 2023. For FY2022, Olam Agri recorded revenue of $36.9 billion, driven mainly by higher commodity prices across the grains and oilseeds complex, as well as edible oils and cotton.
Its ebit increased 13.9% y-o-y to $857.7 million, growing at a four-year CAGR of 31% — this is significantly better than Olam’s primary peer reference group, says Verghese. For FY2022, Olam Agri reached ebitda of $1.07 billion, growing at a four-year CAGR of 28.5%.
Verghese highlights that Olam Agri also has very high capital efficiency of ebit/invested capital at 16.5%, while the average for the last three years is 15.5%. This is about 50% higher than its primary peer reference group.
Meanwhile, Olam Agri also achieved a return on equity of 39% in FY2022 following a previous three-year average of 44%. This is roughly four times the industry mean, says Verghese. “The differentiated business model of Olam Agri has allowed it to demonstrate and deliver high profitable growth, high capital efficiency and high returns,” he adds.
Olam sees a big catalyst in its partnership with Saudi Agriculture and Livestock Investment Company (Salic), expecting it to boost the company’s growth in the Gulf Region. The partnership was first announced in March last year, when the company disclosed that it was selling a 35.4% substantial minority stake in Olam Agri for US$1.24 billion ($1.7 billion). Salic is a wholly-owned subsidiary of the Public Investment Fund of Saudi Arabia.
“When we announced the Salic transaction in March 2022, we had no business in Saudi Arabia. Between announcing the transaction and closing the transaction in December, we sold 1.2 million tonnes of wheat to the Saudi market. In the prior year, we sold zero.
“They are interested in 20 commodities, 12 of which are what they call strategic commodities for food security. We are in many of them,” says Verghese.
On Jan 10, Olam announced that it is seeking a primary listing for Olam Agri on the mainboard of the Singapore Exchange (SGX) as early as the first half of 2023. The company is also exploring a concurrent listing on the Saudi Stock Exchange (Tadawul), subject to market conditions.
“We will be soon seeking shareholder approval for the concurrent Olam Agri IPO both on the SGX and Tadawul, and also the distribution of specie to the Olam Group shareholders of their shareholding in Olam Agri as it becomes an independent, fully de-merged, spun-off entity,” says Verghese.
On Feb 24, Bloomberg reported that Credit Suisse and Mizuho Financial have joined the lineup of banks working on the IPO, which includes names like DBS and Morgan Stanley. EFG Hermes and SNB Capital have also been added as joint bookrunners on the planned dual-listing, which could raise as much as US$1 billion.
“Disappointing year” for OFI
In FY2022, Olam’s value-added ingredients unit Olam Food Ingredients (OFI) saw strong growth in revenue, up 15.3% to $16.4 billion. This is led by pricing growth across both of its segments — global sourcing and ingredients and solutions.
However, OFI’s ebit declined 9% y-o-y to $746.5 million, adversely impacted by the external events in 2022, says its CEO A Shekhar. “Unfortunately, FY2022 has been a bit of a disappointing year,” he adds.
The first of the two major events is the energy shock immediately following the war, which contributed to a big jump in energy prices especially in Europe. This has impacted the execution against its sold contracts, explains Shekhar. The second major event is the impact on the harsher lockdowns in China, which impacted some parts of OFI’s global sourcing business and prices, especially in nut and dairy.
“That said, these two external shocks were offset by a very resilient performance across the rest of the OFI portfolio. What gives us confidence is that the business was not only able to contend with these shocks — both in terms of managing the disruptions and high inflation — but also working very closely with the customers to recover the pricing, which has started flowing through in 3Q and 4Q [last year].
“Therefore, as we enter into 2023, we feel quite confident that we will be back to the trajectory that we established during 2020 and 2021 post-reorganisation. This dip in 2022 is obviously disappointing — but in a sense, we feel more optimistic because net of this, the business was resilient enough to come out of the shock,” says Shekhar.
Olam intended to demerge OFI via an IPO in 2QFY2022, with a primary listing on the London Stock Exchange and a concurrent secondary listing on the SGX. However, on March 24, the company announced that it is postponing the listing due to less than favourable market conditions.
OFI is fully prepared and committed for an IPO as soon as prevailing market conditions allows for it, Verghese asserts.