SINGAPORE
MITA No. 013/06/2008

Company Report

12 March 2009

Olam International Ltd
Gravity-defying growth
Resilient to recession. Olam International Ltd (Olam) has been delivering consistent revenue and earnings growth since its listing in 2005, and growth momentum is expected to sustain despite the global recession. Management has guided for 16% to 20% topline CAGR and 25% to 30% earnings CAGR over the next three years. These goals are achievable, given that demand for food is relatively inelastic and earnings are therefore less vulnerable to the global economic downturn. Olam has already proven its resilience by delivering a 32.9% growth in 1H09 core earnings despite the recent collapse of commodity prices, demonstrating its ability …show more content…

The global economic turmoil has presented Olam with organic and inorganic growth opportunities. Organic growth opportunities could arise from market share gains as the economic crisis ousts weaker competitors, while inorganic growth could come from mergers and acquisitions (M&A) as distressed assets have emerged following the financial meltdown. Improving cash flow from operations. Lower commodity prices have helped to improve Olam's operating cash flows by lowering its working capital requirements. Cash flow from operations improved significantly to S$627.1m in Dec 08 from S$125.8m in Dec 07. We expect disinflation to further ease working capital requirements, boosting the group's cash position. But gearing is high. Olam's key weakness, in our view, is its high gearing ratio relative to its peers. Total debt to equity ratio stands at 4.67x, substantially higher than its peers, whose gearing ratios range from 0.48x to 1.38x. Even after stripping out its liquid inventories and hedged receivables, adjusted gearing stands at 0.55x vs. its peer Noble Group Ltd (Noble) which has an adjusted net cash position. Olam's high gearing could pose refinancing risks in the event of a protracted credit crunch. Rising interest costs could also erode profit margins should the group find itself unable to pass on these higher costs to its customers. Valuations near historical