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
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
"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.
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
'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.
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
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.
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
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.