Olam wants its stock mojo back, but it won't be easy

COULD Olam International be winning back the market's attention after sorely missing out on it for awhile now? If it hasn't yet, the Singapore-based agri and food giant is intent on making a play for it.

Fresh from unveiling two back-to-back three-year plans to take the company to 2024, Olam's long-serving chief executive and co-founder Sunny Verghese said the company is asking experts how best to cast - or rather, recast - itself to investors.

A key component of the six-year plan lies in the tinkering of its bloated portfolio, which spans the entire agriculture value chain - in its own words, "from seed to shelf" - in 70 countries. In doing so, it will generate US$1.6 billion by pulling out of four businesses including sugar and rubber, the small profits of which have made them dispensable; Olam will instead wager more than double that in 12 businesses where it has an edge, such as edible nuts, spices, cocoa and coffee.

On Monday, Olam's stock buzzed. It gained four Singapore cents or 2.2 per cent to end at S$1.86, outperforming the key Straits Times Index, which closed in the red. The counter has gained over 3 per cent since the news broke. A Jan 24 report by Sadif Investment Analytics, noted that investor sentiment towards Olam is "bullish". Sadif has upgraded the stock's rating based on a projected rise in revenue, earnings and book value per share.

Mr Verghese said of the plan to hire financial advisors: "We cannot pre-judge what they will recommend. They will take our strategy and advise us on how we can reorganise our businesses into logical combinations that will best illuminate value."

Indeed, Olam's super-large portfolio may be hard to wrap one's head around. Its assets include almond and pistachio farms in the US and Australia, dairy farming in Russia, packaging tomato paste in Nigeria and owning warehouses and ports in Africa.

Back in 2012, the company's complex business model was one of several aspects of the company - apart from its accounting practices - that drew stinging rebuke from US-based short seller Muddy Waters.

On its part, Olam has acknowledged that its business model may be complicated and that its larger rivals with one or two key businesses were enjoying better price multiples.

The unwieldy portfolio never always bothered the investment milieu though. Up until five years ago, the counter was widely covered by analysts - more than 25, said Mr Verghese. Then too, with a much higher free float, the counter was far more liquid.

"Analysts knew then that if they issued a report on Olam, they would get business, as people were interested in buying and selling our stock," he recalled.

Re-energised

Temasek Holdings threw its moneyed weight behind Olam by launching a bid for the food trader in 2014, and ended up with a controlling stake; Japanese trading house Mitsubishi Corp picked up 20 per cent of Olam a year later. The firm's prospects were re-energised. Olam had won the backing of deep-pocketed shareholders with holding power, but its stock paid a price as the resultant low free float made the counter less liquid.

Today, based on Bloomberg, only two analysts track the stock. Neither has a "buy" call.

Understandably, Olam may be eager to return to its glory days. Why not? Since the debacle with Muddy Waters, which resulted in concerns over Olam's volatile cash flow, aggressive capital expenditure and high debt, the company's efforts to get back in the market's good books deserve mention.

Its net gearing fell steadily from 1.99 times in 2016 to 1.46 times in 2017; as of the end of last September, it stood at 1.38 times. (Olam is due to release its full year ended December 2018 results on Feb 28.)

The latest move to tamp down its portfolio from 16 to 12 assets may be a further step in the company's efforts to make its business model easier to digest for investors.

Olam's capital structure has improved even as it steps up its game on another market bugbear - disclosure and transparency as evinced in its well-articulated strategy plans.

Governance advocate Mak Yuen Teen of the NUS Business School said: "Its debt ratio has fallen by about a quarter since 2011 and its operating cash flows have improved, although it still appears volatile. I would say its fundamentals have improved, but it needs to manage the risks from the change in strategies and the additional investments."

By the final quarter, if things go as planned, the details on Olam's game plan to win back the hearts of investors will be out.

But until then, it may be enough to call it a triumph for Olam. It has managed to distance itself with painstaking bravado from fellow commodities trader Noble Group, which has turned into a cautionary tale of caveat emptor. Noble's troubles have deepened since Singapore regulators revealed they were probing the company.

While investors are rarely sentimental, they can be suckers for stories of weather-beaten corporate survival such as Olam's.

It is this that may be fanning excitement on the stock in recent days.