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Austerity measures take toll on Olam results

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The knock-on effects of Olam International's austerity measures told in declining revenues and tumbling earnings – although the group said that the falls disguised "steady improvement" in its operational performance.

The Singapore-based ag trading giant reported earnings for the January-to-March period down 92% at Sing$31.3m, on revenues down 10.7% at Sing$10.7m.

By volume, sales fell even faster, by 33% to 2.68m tonnes.

Sunny Verghese, the Olam chief executive, said that the decline reflected the "disciplined execution" of measures to tidy up its portfolio of assets, which stretch from Australian nuts to Uruguayan milk – a strategy adopted after complaints from some investors two years ago of excessive debt levels and overexpansion.

Disposals and bond buybacks

The exercise has involved disposing of some less profitable operations, with the group highlighting its retreat in Australian grains, with the quarter also bring the sales of Olam's Australian wool arm and of a 25% stake in the company's packaged foods business.

"Sales volume fell as a result of the company's deliberate strategy to grow in prioritised platforms while reducing volumes or exiting from lower-margin business," Olam said.

Meanwhile, the plunge in earnings reflected largely one-off effects, including a bond repurchase which lifted total finance costs by 43% to Sing$206.0m, but which is expected to save Sing$55.0m-60m a year in interest payments over the next three years.

Underlying earnings rose by 25% to Sing$128.5m, "despite the continued adverse impact of currency devaluation against the US dollar on Olam's import and domestic distribution businesses in some markets".

'Steady improvement'

In nuts and spices, earnings growth was led by the almonds business, helped by higher prices, while both coffee and cocoa contributed to a rise of 8.0% to $83.4m in ebitda (earnings before interest, taxation, depreciation and amortisation) in the confectionery ingredients division.

Ebitda in food staples and packaged foods dropped by 34% to Sing$80.0m, reflecting the retreat in Australian grains, and "continued underperformance" at the Uruguayan dairy operations.

Nonetheless, A Shekar, the Olam finance director, said that the group was "pleased with the steady improvement in operational performance across nearly all our business segments during the quarter".

The company added that "the long-term trends in the agri-commodity sector remain attractive, and Olam is well-positioned to benefit from this.

"Olam believes its diversified portfolio with leadership positions in many segments provides a resilient platform to navigate uncertainties in global markets."

Market reaction

Nonetheless, Olam shares fell 1.0% to Sing1.98 in Singapore, their weakest close in three months.

Analysts at Maybank said that the results "met expectations" but highlighted the downside of Olam's more cautious approach.

"We do not see new growth sources as Olam is slowing down its investments," the broker said, restating a "hold" rating on the shares with a target price of Sing$2.07.


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