Olam International

[d.o.g.]

Particularly Olam and Noble - business model is hard to understand - always incurred more debts with rising business volume.

We have another wannabe in CWT but owner is an accountant by training - will monitor CWT for sometime to see if their German acquisition proved to be any different.

For Olam and Noble, they are traders. That is to say, they move things from point A to point B. They claim to hedge their positions, but this is impossible to verify. They have integrated vertically by buying the producing assets (coal mines, cotton farms etc), so they are now ultra-long these particular commodities.

As for CWT's purchase of MRI, my understanding from an informed source is that MRI was being shopped around, but the major investment banks declined to buy because MRI paid a lot of bribes in its dealings, and these would cause the investment banks to run afoul of the US Foreign Corrupt Practices Act.

Perhaps CWT has some way of walling off the bribes, like the way many companies use local partners in Indonesia to handle these payments. Then they can have "plausible deniability" which in plain English means they can pretend they don't know about the bribes because there is no actual proof.

[money]

Hedging is to smooth out earnings, there will be occasions when they hedge correctly and stupidly. There will always be ups and downs in the commodity market. If they can always hedge correctly, then they can save the trouble of vertically integrating operations and just focus on buying and selling commdities futures (like an investment bank) and make big profits

All the talk about hedging is really just for show. Recently wilmar complain about not making profits cos they didnt buy the oil seeds at the right time or words to that effect. What excuse is that!

[money]

Olam has been actively buying back its shares lately. Is it a value-destructive move? only time will tell.

Personally, a company that grows through perpetual leverage is just too risky for me. The growth story could just be a wonderful cover-up for doing something stupid

[karlmarx]

With debt close to three times it's equity, using cash to buy back shares is a pretty bad idea. They are not using their cash wisely, which is scarce in this tight credit market. Or perhaps they already have problems in the credit markets, and this is done to support the price for an equity raising soon?

[greengiraffe]

Does anyone really understands a trading house model? Fundamentally, I have been waiting for years to see how such a company generates real cashflow for shareholders.

Alongside with Noble, I have always remembered that the higher the volume the business, the higher debt level they incurred.

Moreover, they have always asked investors to evaluate them based on non traditional parameters...

Caveat Emptor

With debt close to three times it's equity, using cash to buy back shares is a pretty bad idea. They are not using their cash wisely, which is scarce in this tight credit market. Or perhaps they already have problems in the credit markets, and this is done to support the price for an equity raising soon?

[karlmarx]

It does not generate FCf because it is constantly expanding at a breakneck speed. If it decides to, it can slow growth and pay out good dividends. But I doubt that's going to happen anytime soon.

In a nutshell, they secure commodities from supppliers and sell it to manufacturers. To reduce their exposure to the spot markets, they hedge. Hedging makes their margins really small. Olam's margins (4%) are higher due to the comparatively high debt/equity of about 3. Noble's low margin (1%) correlates to its much lower debt/equity of about 1. To even further reduce exposure to spot markets from which they procure their commodities, they try to integrate vertically. But acquiring your suppliers is expensive; they need to borrow. Thereby giving you a weak balance sheet.

should commodity prices weaken in years to come, Olam and noble will be hurt pretty bad due to the vertical integration done in recent years at high prices. Oherwise, they should be fine. In any case, Olam at recent prices is still way too expensive for me.

[egghead]

Between Noble and Olam, I prefer Noble anytime.

I see and understand Noble's "Asset Medium" and "Pipeline" strategies. Essentaily, this means that Noble invests in and builds up the supply chain. In most acquisitions, e.g. coal mines, the main idea is to secure the marketing rights; develop the supply chain facilities (e.g. transports, ports, etc) and recycle the capital by selling some of these assets but retaining the marketing rights. This can be seen in the recent deal relating to the M&A of Gloucester Coal to Yancoal.

[freedom]

Olam invests heavily in upstream assets in risky African countries. Olam is putting much less effort on its low return but less risky mid-stream business.

[karlmarx]

Between Noble and Olam, I prefer Noble anytime.

I see and understand Noble's "Asset Medium" and "Pipeline" strategies. Essentaily, this means that Noble invests in and builds up the supply chain. In most acquisitions, e.g. coal mines, the main idea is to secure the marketing rights; develop the supply chain facilities (e.g. transports, ports, etc) and recycle the capital by selling some of these assets but retaining the marketing rights. This can be seen in the recent deal relating to the M&A of Gloucester Coal to Yancoal.

I much prefer noble as well. But to my dismay, the shortists hasn't been as enthusiastic in selling down this stock. ;(

[Temperament]

What about Wilmar? No one seems to be interested? The price is still falling more then Olam or Noble.