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Monday, 20 June 2011

Olam's strategy: Long-term sustainability

Acquisitions, capital raising necessary for growth: CEO


THE market has yet to give its stamp of approval to Olam International's recent acquisitions and capital raising - done in the name of expanding the business - but chief executive Sunny Verghese is unfazed.

Mr Verghese: Argument will be won when the results start showing

During an interview with BT last week, Mr Verghese acknowledged that ventures such as its mega US$1.5 billion project in the Republic of Gabon have a long gestation period, and will not be earnings accretive in the near horizon. The company's recent move to raise funds through a share placement is also dilutive, he conceded.

But he is convinced that such moves are essential to keep the commodity supplier growing over the longer term, and that the argument will be won when the results start showing.

'Now as a CEO, and also as the owner of a business and a substantial shareholder, I have to make capital choices and investment decisions based on the vantage point of view of a continuing shareholder. Olam cannot just be driven by analyst or stock market pressures to deliver in the short term. We have to deliver sustainably over the long term.

'We have to believe that somebody is going to own this business forever, and think of what is in the best interest of that owner, how we can develop a strategy and make capital choices and investment decisions that will allow us to maximise the long-term intrinsic value of this continuing shareholder.'

Since Olam announced its Gabon fertiliser plant and palm plantation projects, its shares have fallen from the $3.25 they closed at before the deal was announced, to $2.59 last Friday - a whopping 20.3 per cent drop.

While the project is just one of the reasons why Olam's shares have tumbled - other reasons include an analyst report that raised questions on Olam's accounting restatements, and macroeconomic fears - investors are clearly unwilling to invest in the firm given that the project, Olam's largest to date, will only yield earnings in its financial year 2014.

The company's recent share placement has not helped. Since announcing its $740 million fund raising two weeks ago, its shares have tumbled 24 cents amid fears that earnings per share (EPS) will be diluted.

This could well be true, but Mr Verghese is quick to point that the group's EPS remains on track to double every three years. Under Olam's six-year plan that spans the financial years 2010-2015, the group set itself the target of earning US$480 million by FY2015 - quadruple the US$120 million that it earned in FY 2009. According to Mr Verghese, this means that earnings should grow at about 25-26 per cent each year. And so far, Olam has 'significantly exceeded this target of 26 per cent earnings growth'.

'So while we have raised additional equity and we will get diluted, we are hoping that on an EPS basis, growth over this period will be at 25-26 per cent. Which means our actual earnings growth could be 30 per cent, but because of dilution, we will still grow at 25-26 per cent.

'If you grow at such rates, you are doubling every three years. And we have developed a strategy and a pathway to be able to do that over the next few years.'

Of the funds raised from its recent fund raising exercises - which includes a US$1.25 billion syndicated-term loan facility and the $740 million equity placement - 40 per cent will go towards expanding its upstream business.

Another 45 per cent will go into its mid-stream manufacturing and processing division, while 10 per cent will be allocated to the group's supply chain core. The remaining 5 per cent will be reserved for Olam's downstream business.

The group's expansion upstream will see it invest in more coffee plantations, and Mr Verghese said it is looking to invest in plantations in Tanzania. Olam already has coffee plantations in Laos.

Olam is also going to expand its dairy farming activities in Uruguay - an initiative that has seen the firm launch its second offer for all of the shares of New Zealand Farming Systems Uruguay. 'Similarly we are going to invest in almond plantations in the US, palm and rubber plantations in Africa, rice farming, peanut cultivation, soyabean cultivation. We are also looking at getting more hard wood and teak forest concessions,' said Mr Verghese.

Plans for its mid-stream business include further investments in sugar milling, soluble coffee manufacturing, cashew processing, cocoa processing, industrial chocolate manufacturing, the packaged foods business - where a few acquisitions are in the pipeline, said Mr Verghese. Olam will make these investments using its tested approach: by making acquisitions that are bite-sized, taking up just 3-4 per cent of its market value. This amounts to some US$200-300 million per acquisition.

'We generally don't do large, company transformation deals. We follow a string of pearls kind of approach so that if one of those transactions or acquisitions go wrong, we are not risking the whole company. And that has been the track record. It has been a very successful model.'

Still, he left the door open to large transformation mergers and acquisitions. Referring to Olam's merger talks with French commodities firm Louis Dreyfus Commodities (LDC) that ultimately petered out, Mr Verghese said: 'While we considered the Louis Dreyfus merger, that is an exception. That is not the norm.

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