Olam Group VC2 0.00%   expects commodity prices and supply chain disruptions to ease from the highs of previous years, although geopolitical uncertainties and volatile market conditions are likely to persist, says CEO Sunny Verghese in an earnings call.

 

Following its 2HFY2022 ended December 2022 results announcement, Verghese says Olam&rsquo s house view is that commodity price disinflation has taken place, although services disinflation is far stickier and is not going to &ldquo come down in a hurry&rdquo .

 

&ldquo One of the big issues for us between 2021 and 2022 was the accelerated pace of interest rate hikes to the highest we have seen in our history. We have been able to pass on most of it to the market &mdash but not all, due to the lead-lag effect,&rdquo says Verghese.

 

In the case of its agribusiness unit Olam Agri, for example, the interest costs more than doubled from 2021 to 2022.

 

Next year, Olam is budgeting for higher interest rates, with the view that the US Federal Reserve will get to restrictive conditions ranging between 5.25% and 5.5%.

 

The company is also cautious about the growing fragmentation of global geopolitics and its potential impact on global food and feed trade flows. While food and feed is not under any sanctions today, it can change depending on the cause and trajectory of the war between Russia and Ukraine, says Verghese.

 

It is therefore important for Olam to be diversified. According to Verghese, the company has a rule to be present in at least 90% of the producing regions for all the key commodities it is involved in. As the company is not very asset-heavy &mdash it minimises the assets carried on its balance sheet &mdash it can be present in all the global trade flows in an &ldquo asset-light&rdquo way which gives it multi-source origination and multimodal flexibility.

 

&ldquo Our volume plan for next year assumes that the [grain shipping] corridors will still not be fully opened. Therefore, all the volume growth would be coming from the alternative producing countries, where we will increase our presence and market share. These volumes will make up for any shortfall given the uncertainty of the war trajectory. We were caught by surprise when the full-fledged war took place last year, but not in 2023 &mdash we are quite comfortable,&rdquo says Verghese.

 

Commenting on China&rsquo s reopening, Verghese says that the impact of China lockdowns were felt mainly in the dairy and nuts business. He is hopeful that the reopening from January would lead to a resurrection of demand and appropriate price adjustments for the two products. That said, there are still a lot of inventory destocking happening in China currently &mdash Verghese expects demand to start picking up in 2Q this year.

 

Big catalyst in partnership with Salic

 

As a group, Olam is optimistic on its agribusiness unit, expecting Olam Agri to deliver better y-o-y operating performance in 2023. For FY2022, Olam Agri recorded revenue of $36.9 billion, driven mainly by higher commodity prices across the grains and oilseeds complex, as well as edible oils and cotton.

 

Its ebit increased 13.9% y-o-y to $857.7 million, growing at a four-year CAGR of 31% &mdash this is significantly better than Olam&rsquo s primary peer reference group, says Verghese. For FY2022, Olam Agri reached ebitda of $1.07 billion, growing at a four-year CAGR of 28.5%.

 

Verghese highlights that Olam Agri also has very high capital efficiency of ebit/invested capital at 16.5%, while the average for the last three years is 15.5%. This is about 50% higher than its primary peer reference group.

 

Meanwhile, Olam Agri also achieved a return on equity of 39% in FY2022 following a previous three-year average of 44%. This is roughly four times the industry mean, says Verghese. &ldquo The differentiated business model of Olam Agri has allowed it to demonstrate and deliver high profitable growth, high capital efficiency and high returns,&rdquo he adds.

 

Olam sees a big catalyst in its partnership with Saudi Agriculture and Livestock Investment Company (Salic), expecting it to boost the company&rsquo s growth in the Gulf Region. The partnership was first announced in March last year, when the company disclosed that it was selling a 35.4% substantial minority stake in Olam Agri for US$1.24 billion ($1.7 billion). Salic is a wholly-owned subsidiary of the Public Investment Fund of Saudi Arabia.

 

&ldquo When we announced the Salic transaction in March 2022, we had no business in Saudi Arabia. Between announcing the transaction and closing the transaction in December, we sold 1.2 million tonnes of wheat to the Saudi market. In the prior year, we sold zero.

 

&ldquo They are interested in 20 commodities, 12 of which are what they call strategic commodities for food security. We are in many of them,&rdquo says Verghese.

 

On Jan 10, Olam announced that it is seeking a primary listing for Olam Agri on the mainboard of the Singapore Exchange (SGX) as early as the first half of 2023. The company is also exploring a concurrent listing on the Saudi Stock Exchange (Tadawul), subject to market conditions.

 

&ldquo We will be soon seeking shareholder approval for the concurrent Olam Agri IPO both on the SGX and Tadawul, and also the distribution of specie to the Olam Group shareholders of their shareholding in Olam Agri as it becomes an independent, fully de-merged, spun-off entity,&rdquo says Verghese.

 

On Feb 24, Bloomberg reported that Credit Suisse and Mizuho Financial have joined the lineup of banks working on the IPO, which includes names like DBS and Morgan Stanley. EFG Hermes and SNB Capital have also been added as joint bookrunners on the planned dual-listing, which could raise as much as US$1 billion.

 

&ldquo Disappointing year&rdquo for OFI

 

In FY2022, Olam&rsquo s value-added ingredients unit Olam Food Ingredients (OFI) saw strong growth in revenue, up 15.3% to $16.4 billion. This is led by pricing growth across both of its segments &mdash global sourcing and ingredients and solutions.

 

However, OFI&rsquo s ebit declined 9% y-o-y to $746.5 million, adversely impacted by the external events in 2022, says its CEO A Shekhar. &ldquo Unfortunately, FY2022 has been a bit of a disappointing year,&rdquo he adds.

 

The first of the two major events is the energy shock immediately following the war, which contributed to a big jump in energy prices especially in Europe. This has impacted the execution against its sold contracts, explains Shekhar. The second major event is the impact on the harsher lockdowns in China, which impacted some parts of OFI&rsquo s global sourcing business and prices, especially in nut and dairy.

 

&ldquo That said, these two external shocks were offset by a very resilient performance across the rest of the OFI portfolio. What gives us confidence is that the business was not only able to contend with these shocks &mdash both in terms of managing the disruptions and high inflation &mdash but also working very closely with the customers to recover the pricing, which has started flowing through in 3Q and 4Q [last year].

 

&ldquo Therefore, as we enter into 2023, we feel quite confident that we will be back to the trajectory that we established during 2020 and 2021 post-reorganisation. This dip in 2022 is obviously disappointing &mdash but in a sense, we feel more optimistic because net of this, the business was resilient enough to come out of the shock,&rdquo says Shekhar.

 

Olam intended to demerge OFI via an IPO in 2QFY2022, with a primary listing on the London Stock Exchange and a concurrent secondary listing on the SGX. However, on March 24, the company announced that it is postponing the listing due to less than favourable market conditions.

 

OFI is fully prepared and committed for an IPO as soon as prevailing market conditions allows for it, Verghese asserts.

 

FOR the second half year ended Dec 31, 2022, agri-business Olam Group : VC2 -3.12%&rsquo s net profit fell 24.5 per cent to about S$200 million from S$264.9 million a year earlier.

 

The group said in a bourse filing on Monday (Feb 27) that this was due to higher finance costs, which had doubled over the period.

 

Revenue for the second half of the year showed a 9.5 per cent improvement from H2 2021, growing to S$26.5 billion from S$24.2 billion.

 

Earnings per share for the period was 4.78 Singapore cents, down from 6.67 cents for the same period in 2021.

 

The company proposed a final dividend of 4.5 cents per share, the same as what was declared in the year-ago period. It will pay out the dividends on May 10, after books closure on May 3. The proposed dividends are subject to shareholder approval at the annual general meeting, which will be held on Apr 25.

 

For the full year, net profit for the group fell 8.4 per cent to S$629.1 million, while revenue was up 16.8 per cent to S$54.9 billion.

 

At a briefing on Monday to discuss the company&rsquo s latest financial results, Olam executives said the group&rsquo s reorganisation has led to a &ldquo sharper focus&rdquo for the group and an improved operating performance, despite a challenging year.

 

Despite volatility in the markets, Olam Group&rsquo s co-founder and chief executive Sunny Verghese said the reorganisation was a &ldquo complex process&rdquo but the group has been able to meet the milestones on time.

 

Verghese, who is also chief executive of Olam Agri, said the group will focus on completing the initial public offering (IPO) of Olam Agri in the first half of this year.

 

He added that the company remains committed to the IPO of Olam&rsquo s food ingredients unit OFI, and will complete this when market conditions improve.

 

In 2022, Olam had to grapple with the effects of macroeconomic events such as the Russia-Ukraine war, the global energy shock and China&rsquo s lockdowns.

 

The issues in China had a significant impact on Olam&rsquo s dairy and nut business segments, because the country is a key consumer of these products, said A Shekhar, chief executive of OFI.

 

Olam&rsquo s consolidated results showed that Olam Agri accounted for 67.2 per cent of revenue in 2022, while OFI&rsquo s share stood at 29.9 per cent. Olam Agri also accounted for 59.7 per cent of invested capital, while OFI&rsquo s portion came in at 26.5 per cent.

 

Olam Agri accounted for 89 per cent of the group&rsquo s volumes, while OFI accounted for 8.4 per cent.

 

Verghese said Olam will &ldquo continue the momentum of the turnaround&rdquo that the group has already begun to see.

 

While volatility will continue, Verghese said Olam&rsquo s business model will mitigate the impacts of volatility on the group.

 

&ldquo There&rsquo s no way of escaping the cyclicality and volatility,&rdquo he said. He noted that Olam has a &ldquo rule&rdquo to be present in 85 to 90 per cent of the producing countries for every commodity that Olam has business in. This, he said, will help the company &ldquo navigate&rdquo volatility.

 

Although food and feed are currently not under any sanctions, Verghese warned that this could all change depending on the &ldquo course and trajectory&rdquo of the war between Russia and Ukraine.

 

&ldquo The uncertainty surrounding (the war) can potentially bring food and feed under sanctions, which will dramatically disrupt trade flows. It is definitely important to be very diversified like we are,&rdquo he said.

 

&ldquo (Olam) can be present in all the global trade flows in a very asset light way&rdquo , which gives the company flexibility, he added.

 

For cost inflation, company executives said some costs are already tapering off. For instance, energy prices are already &ldquo coming off&rdquo . Marine freight and transit costs have also fallen from their highs. However, they reckon labour and interest costs will remain high.

 

In view of market uncertainties and the high interest rates environment, Olam said it will continue to focus on managing its working capital in a &ldquo disciplined manner&rdquo .

 

The company is also &ldquo cautiously optimistic&rdquo about its performance for 2023, barring unforeseen circumstances.

The IPO of Olam Agri Holdings, the agribusiness unit of Olam Group, will provide shareholders with the opportunity to tap onto current favourable agribusiness trends, enhanced global focus on food security as well as the unit&rsquo s track record of consistent performance, its co-founder and group CEO Sunny Verghese said in a briefing.

 

The company had earlier announced that it is seeking a primary listing on the mainboard of the Singapore Exchange (SGX) as early as the first half of 2023. The company is also exploring a concurrent listing on the Saudi Stock Exchange (Tadawul), subject to market conditions. Both markets, interestingly, are two of the better performing ones among their global peers last year.

 

The listing follows the completion of the transaction with Saudi Agriculture and Livestock Investment Co (Salic) last month, which would provide the company with significant additional partnership synergies, says Verghese.

 

On March 25, 2022, Olam announced that it has formed a strategic partnership with Salic with the sale of an estimated 35.4% substantial minority stake in Olam Agri for US$1.24 billion ($1.65 billion), valuing the unit at an equity valuation of US$3.5 billion. Salic is a wholly-owned subsidiary of the Public Investment Fund of Saudi Arabia.

 

If the concurrent listing takes place, the Olam Agri IPO would be the first dual-listing for a company on these two bourses and the first ever listing in Saudi Arabia of a non-Gulf Cooperation Council (GCC) incorporated business.

 

The concurrent listing&rsquo s timeline will depend on regulatory approvals. Given that no foreign company has ever been listed in Saudi Arabia, the regulatory processes may not be able to be completed by the timeframe that Olam has in mind, explains Verghese.

 

&ldquo Our indication is that there is keenness to see this happen &mdash because if they want a first foreign company listed in Saudi Arabia, I think it is a great way to start with a company that is owned by Temasek, Salic and Mitsubishi Corp,&rdquo says Verghese, referring to his largest shareholders. &ldquo They would be quite happy to start with a &lsquo good exemplar&rsquo to then persuade other international companies and global businesses to consider listing in Saudi Arabia,&rdquo he adds.

 

Verghese notes that Tadawul has a market capitalisation of about US$3 trillion. Although oil and gas giant Aramco accounts for US$1.8 trillion of the market capitalisation, the remaining US$1.1 trillion, a substantial pool by any measure. Given that the current valuations in the Saudi market can command relatively higher valuations, the company has decided that the IPO would be more successful if it were to tap both pools of liquidity in Singapore and Saudi, he says.

 

Acknowledging news reports claiming that the IPO is seeking to raise up to US$1 billion, Verghese says the size is still undetermined &mdash although it would be &ldquo meaningful&rdquo and &ldquo material&rdquo .

 

Although no final decision has been made on the Olam Agri IPO offer structure, the IPO may involve an offering in Singapore and globally via an issuance of new Olam Agri shares as well as a sale of shares in Olam Agri by the group.

 

Concurrently, Olam Agri will be demerged from the group, via a distribution in specie of shares in Olam Agri to Olam&rsquo s shareholders, at the point of demerger in conjunction with the Olam Agri IPO. Shareholders of the company will not need to make any payment for shares in Olam Agri and will continue to retain their shares in the Olam.

 

Growing population, urbanisation and changing diet

 

Olam Agri&rsquo s IPO was announced on the back of growing demand for food, feed, and fibre &mdash the three agribusinesses that the company dabbles with &mdash due to the growing population and changing demographics.

 

In November last year, the global population exceeded 8 billion and is expected to grow to 10 billion by 2050. Coupled with massive urbanisation and per capita income growth, Verghese believes that there is going to be an exponential growth in demand for agro industrial raw materials.

 

He further points out that growing per capita income translates to an acceleration of a transition in dietary habits, from a carbohydrates and cereal-based diet to a more protein and fats-based diet. This leads to a multiplier impact on the need for raw agricultural materials to feed ruminants and poultry, as meat consumption is expected to grow up to 500 million tonnes in 2050, versus an estimate of 325 million tonnes last year.

 

Another significant issue seen in the industry is more diversion of food and feed raw materials into biofuel use, which will continue as economies look for energy transition strategies. Verghese also points out the growing scarcity of resources, particularly arable land and water availability amid the need to almost double food production to meet the growing demands in dietary changes.

 

To stay ahead of Singapore and the region&rsquo s corporate and economic trends, click here for Latest Section

 

Food security concerns are increasingly gaining prominence across the world. As a result of food price inflation, roughly 60 countries have put in place more non-tariff barriers, says Verghese. This includes outright export bans, lifting of import duties as well as other protective measures to achieve food security in terms of nutritional value and food accessibility.

 

In Saudi Arabia, the mandate of Olam Agri&rsquo s strategic investor Salic is to ensure food security for Saudi Arabia, which imports between 70% and 75% of its total food requirements. Verghese believes that via Olam Agri will be able to aid the execution of the food security mandate within and beyond Saudi Arabia to the broader Middle Eastern region.

 

In terms of Olam Agri&rsquo s operating performance, in FY2021, the company generated $31.3 billion in revenue. Ebitda stood at $930 million with a CAGR of 42.5% over the four year period of 2018 to 2021, while ebit stood at $753 million with a four year CAGR of 46.7%. Its ebit to coverage ratio was close to 16%. As at last year, Olam Agri had a presence in over 30 countries, with a workforce of 9,100 employees across more than 50 manufacturing and processing facilities.

 

Delay in OFI IPO

 

Olam Agri is one of three of Olam&rsquo s operating groups, and follows a transformation reorganisation plan to split the company into three distinct and coherent groups in January 2020. The other two operating groups are its value-added ingredients unit Olam Food Ingredients (OFI) and an umbrella category of &ldquo remaining business&rdquo .

 

Olam intended to demerge OFI via an IPO in 2QFY2022, with a primary listing on the London Stock Exchange and a concurrent secondary listing on the SGX. Last year, however, it announced that the listing was postponed, citing less than favourable market conditions. Verghese asserts that the company is ready for the listing, but will do so sequentially after Olam Agri&rsquo s IPO.

 

&ldquo We believe that an Olam Agri listing is more imminent and more possible, even under current market conditions. We do not want to do a concurrent listing for Olam Agri and OFI &mdash although they provide different propositions with different equity stories &mdash as we do not want large institutional investors to [make a choice between them]. Instead, we want some clear distance in time between the two,&rdquo he explains.

 

Since OFI&rsquo s IPO preparations were done earlier, it has completed the establishment of separate governance with a new board of directors. The board is chaired by Irish businessman Niall FitzGerald, known for his extensive experience in Unilever.

 

Meanwhile, Olam Agri currently has an &ldquo initial board&rdquo consisting of six members of shareholder representatives which will end its tenure prior to the IPO. These are the representatives from major shareholders such as Temasek, Salic and Mitsubishi Corp.

 

Olam has embarked on a search for an IPO-ready board as well as leadership management team which will be announced in due course.

OLAM Group : VC2 +3.9% has outlined plans to list Olam Agri, its agribusiness unit, as early as H1 2023, it said on Tuesday (Jan 10).

 

The move will result in a primary listing in Singapore, a concurrent one in Saudi Arabia, and a demerger of Olam Agri and Olam Group through a distribution in specie of shares in Olam Agri to shareholders.

 

If the transaction goes through, Olam Agri&rsquo s initial public offering (IPO) will be the first dual-listing for a company on both the Singapore and Saudi Arabia stock exchanges and the first-ever listing in Saudi Arabia for a non-Gulf Cooperation Council incorporated business, Olam Group said in a press statement.

 

The latest development comes days after Bloomberg reported that the group had picked banks to lead the proposed Olam Agri listing, which could raise as much as US$1 billion, according to sources.

 

Although no final decision has been made on the Olam Agri IPO structure, the group said the IPO might involve an offering in Singapore and globally via the issuance of Olam Agri shares and a sale of shares in Olam Agri by Olam Group.

 

Olam Agri will be demerged from the group through a distribution in specie of Olam Agri shares to Olam Group shareholders. They do not need to pay for any Olam Agri shares and will continue to hold their shares in the group.

 

There is no change to the group&rsquo s plans for Olam Food Ingredient&rsquo s (ofi) concurrent listings in Singapore and the London Stock Exchange, it said. The IPO will take place after Olam Agri&rsquo s listing, subject to market conditions.

 

Olam Group said it chose SGX as its primary listing venue due to its strong investor base for food and agribusiness companies, along with continued long-term shareholder support.

 

The additional listing in Saudi Arabia will allow the group to access the market&rsquo s large incremental investor base. Building on its partnership with The Saudi Agricultural and Livestock Company (Salic), Olam Agri will be positioned to enhance its activities in the Gulf region, particularly in Saudi Arabia.

 

In December, Olam Group completed the sale of a substantial 35.4 per cent minority stake in Olam Agri to Salic for US$1.2 billion, valuing the business at about US$3.5 billion.

 

Olam Group chief executive Sunny Verghese said Olam Agri has demonstrated a consistent performance track record, with operating profit rising at a compound annual growth rate of 40.1 per cent over the last three years.

 

&ldquo With the completion of the minority stake sale and strategic partnership with Salic, Olam Agri is positioned to grow as a result of the demand for food, feed and fibre across end-consumption growth markets,&rdquo he added.

 

Olam Group said on Tuesday that there is no change to its plans for Olam Food Ingredient&rsquo s (ofi) concurrent listings in Singapore and the London Stock Exchange. The IPO will take place after Olam Agri&rsquo s listing, subject to market conditions.