Demand pickup for commodities bodes well for Olam: CEO Sunny Verghese

THE outlook for Olam International looks positive as countries around the world see a "sharp snapback" from the worst stage of the pandemic and commodity prices stay firm, said chief executive Sunny Verghese on Tuesday.

Addressing media and analysts at a briefing to discuss a rights issue as well as a financial update for the first fiscal quarter ended March, Mr Verghese said "growing and recovering demand and tight commodity supply" have led to elevated commodity prices.

But the rate of recoveries across Olam's key markets has been uneven. China, Japan and the US, for instance, have recovered strongly. But the company is bracing for a "slightly more patchy" recovery in certain countries in South Asia, such as India and Bangladesh.

Olam deals in various commodities under its two business units: Olam Food Ingredients (OFI) processes and supplies food ingredients from cocoa, almond, coffee, dairy, spices and nuts; while Olam Global Agri (OGA) is a food, feed and fibre agri-business involving grains, rice and edible oils.

Mr Verghese said OFI's spices business has benefited from pantry restocking effects at both the household and retail levels with the onset of the Covid-19 pandemic, and continues to enjoy greater demand as more people cook at home.

Meanwhile, demand for cocoa and coffee, especially in the out-of-home consumption segment, is recovering as major economies in Europe and the Americas have reopened gradually.

OGA's food and feed segments are also expected to show positive growth in H1 2021 against H1 2020, and restocking can be expected from the feed services segment.

Olam posted net profit of S$155.6 million for Q1 2021, 13.1 per cent lower than the S$179.1 million posted in the corresponding quarter last year.

The group attributed the difference largely to a net exceptional gain of S$43.2 million in Q1 2020, arising from the divestment of its entire stake in Indonesian sugar refinery Far East Agri and partial stake sales in the ARISE infrastructure and logistics businesses.

Operational profit excluding exceptional items grew 15.5 per cent to S$157 million, from S$135.9 million the year prior. Revenue was up 14.5 per cent to S$8.8 billion for the year, from S$7.68 billion.

Olam also announced a 3-for-20 rights issue at S$1.25 per share. The group expects to raise S$601.7 million in gross proceeds, most of which go towards repaying a loan taken to buy spice company Olde Thompson.

Olam intends to use 90 per cent of the net proceeds to repay US$400 million of a US$1 billion loan facility related to the Olde Thompson acquisition, and the remaining 10 per cent for working capital and general corporate purposes.

Olam's major shareholder Temasek Holdings has agreed to subscribe, or get one or more Temasek companies to subscribe, for any rights shares that are not taken up.

When asked if another substantial shareholder Mitsubishi Corporation will also be subscribing to the rights, Mr Verghese said he was unable to speak on behalf of shareholders and that they would assess the situation and "make their own determination".

Mr Verghese said he intends to fully subscribe for his portion of the rights issue, but declined to comment on behalf of the other directors.

Looking ahead, he added that the rights issue would reward shareholders by presenting them with an opportunity to acquire shares at a "fairly attractive discount" and allowing them to participate in the company's growth.

For its rights issue, Olam said its issue price of S$1.25 per share represents a 26.9 per cent discount to its last traded price of S$1.71 on Monday. The issue price also represents a 24.2 per cent discount to the theoretical ex-rights price per share of S$1.65.

The record date for the rights entitlements is June 30 and Olam's shares will trade ex-rights from 9am on June 29.

Shares in Olam closed at S$1.62 on Tuesday, down 5.3 per cent or S$0.09.