(Stocks Discussion) SGX: Olam International (SGX: O32)? - Seedly
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Anonymous

Asked on 03 May 2019

(Stocks Discussion) SGX: Olam International (SGX: O32)?

Discuss anything about share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment!

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated on 06 May 2019

TL;DR Operating in the commodities and agricultural business means that profit margins are quite low. However, Olam has still maintained strong cash flows, though high debt levels are something to be cautio

Business Profile

Olam International is a leading agri-business operating across the value chain in 70 countries, supplying various products across 18 platforms to over 23,000 customers worldwide.

Source: Synel Industries

As a supply chain manager, Olam is engaged in the sourcing of a wide range of agricultural commodities from the producing countries and the processing, warehousing, transporting, shipping, distributing and marketing of these products, right up to the factory gate of its customers in the destination markets. Commodities that Olam is involved in include coffee, cocoa, sugar, rice, cotton, timber, nuts, spices and beans

SWOT Analysis

Strength: Their business model is based on adjacency expansion to create systematic, repeatable growth initiatives around its core supply chain business. They also seem to possess strong trading, & risk management skills which have enabled it to become a market leader. Their vertical integration across the value chain has also allowed it to capture a larger market share while leveraging on synergies and reducing costs.

Weakness: Operating in the commodities and trading industry means that profit margins tend to be very thin due to competitive prices and high operating costs. The lack of product differentiation for certain business segments means that switching costs for customers are quite low.

Opportunities: Understanding that product differentiation is tough, Olam has expanded into vertical integration and have tried to value-add to their commodities. This might allow higher margins, while also allowing product diversification and revenue growth.

Source: Olam Annual Report FY18

Threat: As an agriculture player, Olam’s volume and product prices may be affected by unexpected weather-related disruptions and natural disasters. Also, as Olam has operations in various emerging countries, it may be negatively impacted by volatility in FX rates. This risk is predominantly related to Olam’s packaged foods business in West Africa which imports raw materials.

Financials

Income Statement

Source: Olam Annual Report FY18

Overall, the firm had generated over $30bn in revenue. A healthy sign is that revenue has been increasing steadily since 2015, which was $18.5bn then.

This revenue was mostly derived from the "food staples and packaged foods" segment and the "confectionery and beverage ingredients" segment.

Source: Olam Annual Report FY18

Revenue also seems to be well split up between the different geographical regions, which could mean that there is less concentration risk on a certain region. This diversification also helps to reduce currency risk when exchange rates fluctuate.

Source: Olam Annual Report FY18

Despite increases in revenue, profitability had fluctuated. This thus implies that Olam's cost structure isn't very stable and does not necessarily bear a direct relationship to revenue.

Balance Sheet

Source: Olam Annual Report FY18

The company possesses quite a high Net Debt/Equity ratio of 1.32. This means that the company has quite a lot more debt than equity. However, at least this figure had improved over time. The company also has a Net Debt/EBIT ratio of almost 10 times, which proves that the business has taken on quite some debt. The Interest coverage of EBIT/Interest Expense ratio was also about 1.7 times. This reflects the weak profitability the company has (EBIT margin of 2.6%), and high interests they have incurred from debt.

This means that the firm faces a higher default risk if they can't pay back their debt or interest payments on time. Moreover, it means that more cash flow generated in the future would be used to pay back the debt. Additionally, there is greater exposure to interest rates risk if interest rates do rise in the future.

Cash Flows

Source: Olam Annual Report FY18

Cash flow from operating activities was almost 4 times higher than profit before tax because of the large non-cash expense of depreciation and amortization at $400mn. Additionally, Olam's working capital management allowed it to grow cash flow as well by $300mn.

Being a capital intensive business, it is unsurprising that capital expenditures were quite high at $800mn. Although this figure is high, it is still much lower than their cash flow from operating activities of $1.4bn. This suggests that the company may have more than enough internal cash flow to run operations and grow.

However, a large chunk of cash had been used to pay dividends ($240mn) and repay the debt (308mn). Although such figures are high, the paying down of debt will help to reduce risks and improve balance sheet strength. The firm has a dividend payout ratio of almost 0.7, which is still quite a high figure.

Overall, the firm has a free cash flow of $1.5bn, as helped by its strong cash flow from operating activities. After paying off debt, there is still $1bn free cash flow left for shareholders, which is still quite high. This is what enabled the firm to give out a good amount of dividends despite weak profits.

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