Olam bullish on cocoa, coffee - and tomato paste

Olam International made upbeat calls on prices of cocoa and arabica coffee – and tomato paste – as the agricultural commodities trader unveiled a small rise in core profits, and progress in its plans to cut its complexity and debts.

The Singapore-based group - with Noble and Wilmar International one of the "NOW" group of Asian agricultural trading giants – said that the "exceptionally dry" weather in Brazil would cut coffee production in the top producing country to 50m-51m bags, below initial hopes for 57m-60m bags.

"There could still be rains and there's still scope for rains to come in. But there's also a risk of frost," Sunny Verghese, the Olam chief executive, told investors.

"So structurally, the arabica market, we are friendly to the market now," if adding that the group was "neutral" on robusta coffee, which was likely to stay pressured by Vietnam's record crop.

'Bullish signal'

On cocoa, Mr Verghese said Olam was "fundamentally quite bullish", given the rise in consumption of the bean to swallow "very heavy production and supply".

"Despite the 4m-tonne crop, demand has been surprisingly strong," he said.

"Despite a very large cocoa crop we expect a deficit of 145,000 tonnes this year. And that is on top of the deficit we had last year."

The stocks-to-use ratio, a key pricing metric, was for cocoa on course to fall from 38% to 34%, "and that is a bullish signal when end use ratios come down to below 35%," he said.

"So we are quite friendly to cocoa process and cocoa market overall."

'Structural deficit situation'

And, beyond the realms of widely traded agricultural commodities, the group forecast higher prices of tomato paste too, as drought in California threatens US output, after a weak Chinese tomato crop last year.

"China was the biggest exporter globally. As a result, from a supply and demand point of view… it has been a bullish market in tomato paste," Mr Verghese said.

The squeeze on supplies will "worsen going forward because there is a drought in California", a key US tomato-growing state.

"You there expect a significantly lower crop in the next planting season," exacerbating a "structural deficit situation" in the paste market.

Company revamp

The comments came as Olam unveiled a 12.5% fall to Sing$134.9m in after-tax profits for the October-to-December quarter, on revenues down 9.8% at Sing$3.69bn.

However, this decline reflected largely one-off factors, such as the volatile revaluation of biological assets factor.

Earnings before interest, tax, depreciation and amortisation (ebitda) rose 0.9% to Sing$315.9m, on a margin of 7.0%, up from 6.4% a year ago.

The group - which has turned from a keen acquisitor of assets to a selected seller - unveiled progress too on its efforts to revamp the business, following criticism from short-selling fund Muddy Waters over its debt levels, saying it had released Sing$134.1m in cash so far from the revamp, and boosted its profits base by Sing$36.1m.

Market reaction

The results were welcomed by broker OCBC, which lifted its forecasts for Olam's profits and raised to "buy" from "hold" its rating on the group's shares.

OCBC lifted to Sing$1.76 per share, from Sing$1.45 per share, its estimate for Olam's fair value.

The shares closed up 2.6% at Sing$1.575 in Singapore, their best close since August last year.

Goldman lifts coffee price hopes, but wary on ags
Cocoa officials quash talk of deficit upgrade
Olam ditches drive to exploit Canada grain reforms
Agricultural Commodities
Agricultural Markets
Agricultural Companies
Agricultural Events