Olam International

[Musicwhiz]

Speculative news continues to buoy the share price of Olam, voted as one of Forbe's Best Under A Billion Companies this year.

Considering it is (always) highly leveraged and net margins are razor thin; plus they like to engage in serial M&A, I thus cannot find a good reason for investing in the Company, despite it being a "blue chip".

Sep 25, 2010
Olam in talks that could lead to merger
Shares surge although firm says discussions with French giant Louis Dreyfus still preliminary
By Gabriel Chen

COMMODITY firm Olam International's share price jumped yesterday on news that it might be merging with Louis Dreyfus Commodities, the world's largest rice and cotton trader.

Olam said it was in initial talks with the French giant over a possible collaboration that could take the form of a merger.

Despite uncertainty over whether a deal would be done, the counter surged 9.2 per cent to a three-year high before closing 20 cents, or 6.8 per cent, higher at $3.15.

In a statement to the Singapore Exchange, Olam confirmed the talks with Louis Dreyfus after France's Les Echos newspaper reported that the family-owned group was considering a merger and a listing of certain businesses.

'The company wishes to emphasise that discussions are still preliminary and that no definitive agreements in relation to the possible collaboration have been entered into as of the date of this announcement, and the possible collaboration may or may not proceed,' Olam said.

Olam, in which Temasek Holdings holds a stake of about 14 per cent, said it 'constantly reviews' corporate development opportunities that are in line with its corporate growth strategy.

It also urged shareholders and potential investors to refrain from taking any action that may be prejudicial to their interests and to exercise caution when dealing in Olam shares.

Analysts believe a full merger between Singapore-based Olam and Louis Dreyfus is unlikely.

'Olam is listed and trades at a premium to its peers. And that is because Olam is transparent, its management well-spoken and its strategy very well laid out,' said a foreign analyst who asked for confidentiality.

He said Olam trades at about 22 times earnings per share, while its peers like Noble Group and Archer Daniels Midland Company trade at about 10 times and 12 times respectively.

'So Olam will likely have to issue shares to purchase Louis, which is bigger but unlisted. But by doing that, it stops being Olam and will end up destroying its own value. Why would Olam's shareholders want to do that?'

Temasek Holdings declined to comment yesterday.

Olam, which processes agricultural goods such as nuts and coffee for food industry giants like Nestle and Cadbury, was founded by Mr Sunny Verghese, its chief executive. E-mail messages sent to Mr Verghese yesterday were not responded to.

Veteran investor Jim Rogers, an Olam shareholder, is waiting to see what happens. 'There are going to be many mergers in the commodities field in the next decade since that is where the money is and where prospects are good,' he said.

While a full merger is unlikely to be on the cards, analysts think the two companies could discuss a joint venture in areas where their operations overlap.

'They have overlaps in business lines like coffee, rice, cotton and sugar. What we'll see, if anything comes to fruition, is a scenario where certain businesses of Louis Dreyfus get spun off, with the overall effect being a joint venture,' another analyst said.

There has been ongoing consolidation in the commodities sector.

Earlier this month, Sempra Energy and Royal Bank of Scotland agreed to sell the retail commodity marketing operations of their joint venture to Singapore-based Noble Group for US$317 million (S$421 million).

Palm oil firm Wilmar International is also in the process of acquiring Australia's Sucrogen for US$1.5 billion.

gabrielc@sph.com.sg

[yeokiwi]

I don't understand. At a PE of 22, it makes sense to buy another company of lower PE using shares.
Why is it value destroying?

At PE of 22, it makes so much more sense to do private placement and buy company using shares.

[Musicwhiz]

Perhaps the writer has failed to highlight the very high debt levels which Olam has, or the fact that net margins are razor-thin?

Business Times - 19 Nov 2010

Patience with Olam will pay off

By FELDA CHAY

APPEARANCES can deceive. Among the victims of the recent market weakness are commodity supply chain managers, with Olam International the most badly hit compared to its peers. Yet, the Temasek Holdings-linked firm is possibly the more attractive bet, compared to fellow industry players Wilmar International and Noble Group.

Since last Thursday, Olam's share price has fallen by 6.9 per cent, a more severe drop than Wilmar's 0.8 per cent and Noble's 5.5 per cent. The Straits Times Index fell 2.4 per cent over the same period.

Yet, Olam has much to offer investors. The first is its growth potential. The smallest among its peers, the group recently announced that it is taking on a huge US$1.3 billion investment in a fertiliser plant in West Africa's Gabon, saying that the project would reap Ebitda (earnings before interest, taxes, depreciation and amortisation) of US$300-350 million, with return on equity (ROE) expected to be more than 45 per cent.

Olam also said that it would be investing in a palm plantation project with the Gabon government, where it expects to spend US$236 million, most of which will be pumped into the project in the first seven years. According to Olam, this project will generate Ebitda of US$100-120 million, and ROE of between 35-40 per cent.

As conventional wisdom goes, it is much easier for smaller firms to grow and achieve high growth rates, compared to their larger, more established counterparts. Olam's more established peers will therefore have to invest in far bigger projects to achieve growth rates that are equal to those that it is likely to enjoy in the longer term.

Why then Olam's underperformance in the stock market? There is evidently a view that it is too early to take into consideration the returns from the Gabon deals, which are expected to contribute to earnings only four years down the road at the earliest.

This appears to be the stance that the market is taking, so the latest deals have so far failed to lift Olam's stock price since they were announced last Saturday. Over Monday's and Tuesday's trading sessions, Olam's share price continued to fall by as much as 2.2 per cent on Monday and 2.8 per cent on Tuesday to $3.09.

Such a view, however, fails to take into account the significance of the Gabon investments - Olam's largest to date - and what they signify. Olam, with past deals that have been described by DBS Vickers Research as 'bite-sized', is now on to bigger things.

It might seem premature to jump to such a conclusion based on one large investment, but bear in mind that this is not the first time this year that Olam has been linked to a deal that will see it grow significantly.

In September, it said that it had engaged in preliminary confidential discussions with global commodity trading house Louis Dreyfus Commodities (LDC) 'in relation to a possible business collaboration which may take the form of, among others, a merger'. While there has been no word on the outcome of the discussions since then, the talks, together with the confirmed Gabon deal, could mean that the firm is set for a major trajectory in growth.

Olam is also a cheaper buy compared to its peers. The stock is currently trading at 16.9 times its historical earnings, according to Bloomberg data. In contrast, Noble is trading at 21.4 times, and Wilmar 21.2 times.

One caveat is that there are significant differences between the firms. Noble, for one, has interests in agriculture, logistics, chartering, metal and ores, coal and carbon credits, while Wilmar is largely involved in the palm oil sector. Olam, meanwhile, is in the agriculture, food and logistics space.

Still, this highlights Olam's attractiveness. Olam operates across the entire supply chain for most of its products - while it doesn't own fields, it operates from the farmgate onwards, which allows the firm to cut out many of the traditional middlemen in the business, cutting back on operational costs.

Coupled with its potential to steadily deliver high earnings growth - something it has proven over the years - it can be argued that Olam deserves to trade at a premium and not at a discount to its peers. The big investments may not pay off immediately, but Olam could reward investors who are prepared to be patient and look further into the future.

[Nick]

Low net margins is not really an issue since it is an industry norm. It also makes it unattractive to new players and small players will find it difficult to succeed since scale and volume is the key ingredient to success hence there will be plenty of consolidation leading to a few big players dominating a pretty big sector. High margins, on the other hand, means that the company will always face competition from new players seeking a slice of the juicy pie hence it needs to consistently upgrade itself and its products (and keep its staff happy) so that it can maintain its niche.

Not saying high or low margin is good. Just wishing to point out that it is inaccurate to say all low margin companies are bad.

[piggo]

Jack welch made quite a case for getting out low margins businesses...can't recall where he said it but constant undercutting limits growth and earnings.

[Musicwhiz]

Low net margins is not really an issue since it is an industry norm. It also makes it unattractive to new players and small players will find it difficult to succeed since scale and volume is the key ingredient to success hence there will be plenty of consolidation leading to a few big players dominating a pretty big sector. High margins, on the other hand, means that the company will always face competition from new players seeking a slice of the juicy pie hence it needs to consistently upgrade itself and its products (and keep its staff happy) so that it can maintain its niche.

I don't totally agree with the above.

Low net margins being an industry norm will imply that the industry itself does not demonstrate favourable economics; hence an investment into any company within the industry should be made only after careful consideration and a ton of due diligence (and even then only if there is sufficient margin of safety). The problem with low margins is that any unexpected expense will easily wipe out a chunk of earnings and drive the Company into a net loss position. Even though barriers to entry may be high, this does not itself make a Company attractive for investment.

For companies with high margins, it may not be that it will constantly be assailed by other companies hoping to get a portion of the pie. It could be in a good niche where there are few players but there are also significant barriers to entry in terms of capex to be able to compete effectively. Or it could have a track record and patents/certifications which make it the vendor of choice for its customers. Such a company would have a very strong moat (filled with man-eating crocs, no doubt!) which is almost unassailable. Of course, this is just theory, in practice it is tough to find such a company trading at low valuations.....

Just my 2-cents.

[ag88]

despite the high commodities prices and there is a possibility that such commodities prices could go up (much?) higher i.e. food shortage could chase prices really high
same with oil

i've been avoiding such stocks in part due to the large volatility swings

i'm not sure how to handle commodities to make out a sensible investment thesis on these. e.g. investment criteria, risk management, etc, any 1 care to share?

--
another group of stocks which has similar bubble like, volatile behavior is perhaps property asset stocks (e.g. UIC, UOL etc) and REITS

my 2 cents here:
http://www.valuebuddies.com/thread-277-p...ml#pid1915

[cif5000]

Low net margins is not really an issue since it is an industry norm. It also makes it unattractive to new players and small players will find it difficult to succeed since scale and volume is the key ingredient to success hence there will be plenty of consolidation leading to a few big players dominating a pretty big sector.

Not saying high or low margin is good. Just wishing to point out that it is inaccurate to say all low margin companies are bad.

I think there's wisdom in these words. Wal-Mart is one of Buffett's regrets, and closer to home we have Dairy Farm. They are certainly good companies running on thin margins. Of course price still matters to make them good investments.

Other textbook teachings include avoiding long cash cycle or high capex businesses. They are definitely good advices for the average investors.

Investments painted in broad strokes rarely provide extraordinary returns.

[EnSabahNur]

Other textbook teachings include avoiding long cash cycle or high capex businesses. They are definitely good advices for the average investors.

Investments painted in broad strokes rarely provide extraordinary returns.

Can you give a few examples of companies or industries with long cash cycles?

[donmihaihai]

Low net margins is not really an issue since it is an industry norm. It also makes it unattractive to new players and small players will find it difficult to succeed since scale and volume is the key ingredient to success hence there will be plenty of consolidation leading to a few big players dominating a pretty big sector.

Not saying high or low margin is good. Just wishing to point out that it is inaccurate to say all low margin companies are bad.

I think there's wisdom in these words. Wal-Mart is one of Buffett's regrets, and closer to home we have Dairy Farm. They are certainly good companies running on thin margins. Of course price still matters to make them good investments.

Other textbook teachings include avoiding long cash cycle or high capex businesses. They are definitely good advices for the average investors.

Investments painted in broad strokes rarely provide extraordinary returns.

I was thinking about Wal-Mart earlier but I don't know its net margin. But I believe as a retailer its net margin won't be too low, maybe around 3 - 5%.

Since this is about margin, moat and warren Buffetts, why not look at McLane, a distributor to Wal-Mart. It was purchased by Warren Buffetts, who love company that has very strong moat (filled with man-eating crocs) for Berkshire Hathaway at around 2003 from Wal-Wart. In FY2009, it has a pre-tax profit margin of just over 1%.

taken from shareholder letter "Grady Rosier led McLane to record pre-tax earnings of $344 million, which even so amounted to only
slightly more than one cent per dollar on its huge sales of $31.2 billion."

Is McLane a mistake for WB? I don't know but they should be doing quite good since their names appeared in the letter. Maybe Grady Rosier know how to put man-eating great white sharks in fresh water outside McLane.

Look at company that owned investment properties to collect rental incomes. Net profit margin usually north of 50%. But what can one say about this?

Can you give a few examples of companies or industries with long cash cycles?
Go to SGX website, start from A to Z(or Z to A) and look at the financial statements. And you won't be disappointed.

---

another group of stocks which has similar bubble like, volatile behavior is perhaps property asset stocks (e.g. UIC, UOL etc) and REITS

my 2 cents here:
http://www.valuebuddies.com/thread-277-p...ml#pid1915

Why not you throw out some number on UIC and UOL which support your bubble like comment?