Olam H1 profit inches up 1.8% as group battles inflation, cost pressures

OLAM Group on Friday (Aug 12) reported a net profit of S$429.1 million for the first half of the fiscal year ended June 2022, up a marginal 1.8 per cent from S$421.5 million in H1 2021 as higher finance costs partly offset strong Ebit (earnings before interest and tax) growth for the period.

Revenue for H1 2022 rose 24.6 per cent on year to S$28.4 billion from S$22.8 billion the previous year, as the group recorded higher prices across several of its products and commodities.

Finance costs, however, expanded 36.7 per cent to S$327.3 million from S$239.4 million previously. Olam attributed this to a high interest rate environment, taxes and higher one-off exceptional charges related to its recent re-organisation.

Excluding exceptional items, operational profit after tax and non-controlling interest (Patmi) was S$472.5 million, up 8.2 per cent from the previous year.

Olam’s board has declared an interim dividend of 4 Singapore cents per share, unchanged from a year ago.

At Olam’s results briefing, chief executive Sunny Verghese said the group had entered into the year with “very significant developments”. Some of these include geopolitical troubles – including the Russia-Ukraine war and escalating tensions in Taiwan – and supply chain disruptions. 

In terms of operating groups, Olam’s food ingredients unit ofi saw revenue rise by 22.1 per cent year on year to S$8.1 billion due to higher sales volume and higher sales prices across its ingredients and solutions, and global sourcing segments.

Ebit (earnings before interest and tax) was down 11.8 per cent to S$265 million amid inflationary pressures such as the surge in energy costs, as well as additional depreciation and amortisation due to various acquisitions concluded last year.

A Shekhar, ofi’s chief executive, said the nature of the business is such that input raw material price increases and costs “happen much faster”. As such, the different products in ofi’s portfolio had to navigate market volatility as macroeconomic uncertainty weighed on supply-demand fundamentals.

For instance, Shekhar said the prices of almonds were lower in H1. Coffee, which had surged in prices in the earlier part of the year, had also pulled back. Cocoa, which enjoyed strong demand, was also hit by price increases. Cost increases for the likes of energy and labour have impacted the unit, he said.

The outlook is nonetheless optimistic, Shekhar stressed. 

“We feel very strong about the prospects of the business…and we do not feel that there is any change in the medium-term guidance in terms of volume growth as well as Ebit growth,” he said. 

He added that ofi is “increasingly doing the cross-sell and upsell” techniques for its products, which he reckons will be reflected in ofi’s margins going forward.

Olam Agri – the unit that comprises the grains and animal feed, edible oils, rice, cotton and commodity financial services businesses – booked a 26.2 per cent year-on-year increase in topline to S$19.6 billion, while Ebit was up 49.4 per cent to S$608.8 million.

Verghese, who is also the unit’s chief executive, said Olam Agri was able to capture opportunities from favourable structural growth trends while navigating supply chain risks and disruptions that arose from the Covid-19 pandemic and Russia-Ukraine war.

“Olam Agri is poised to build on its track record by taking advantage of the rising demand for food staples and agri-industrials raw materials as well as the shift to protein-based diets in high-growth emerging end-consumption markets,” he said.

Verghese said Olam Agri’s business is also “relatively recession resistant” as its products are non-discretionary and difficult to substitute. However, while the demand end is predicted by markets, he warned about uncertainties in the supply side of the business such as weather conditions, which can adversely affect crops like corn.

Another one of Olam Agri’s strengths, he said, is in the differentiated nature of its business. The average return on equity (ROE) for the industry stands at about 8 to 9 per cent, while Olam Agri’s ROE is currently at 45 to 50 per cent.

The group believes it is “well-positioned for 2022 as the revised sales pricing and margin recovery gathers pace in H2 2022” and expects to deliver a better year-on-year performance for the full year.

It further anticipates additional one-off and non-recurring expenses associated with its re-organisation plan in H2, although these expenses for the full year are expected to be lower than the total recorded for 2021.

As at 1.44pm, shares of Olam were trading flat at S$1.57.