Monday, September 1, 2014

Olam's Ukraine grain volumes 'dried out' by crisis


Olam International's Ukraine grain business has "completely dried out" because of the country's political crisis, the group said, as it unveiled concerns over Africa's ebola outbreak too.

The Singapore-based agribusiness giant - in follow-up comments to its announcement of a 1.5% rise to Sing$48.5m in underlying earnings for the April-to-June quarter – said that a drop in grain trading profits was one of the factors behind its sluggish growth.

Grain volumes fell, in part because of asset disposals, with Olam revealing it had sold a stake in its South African grain trading operation besides the $68m sales to Japan's Mitsubishi Corp, as announced in June, of 80% of its Australian business.

"That has meant lower volumes as well as lower ebitda [earnings before interest, tax, depreciation and amortisation] in grains which is a choice that we have made," said Shekhar Anantharaman, Olam director for finance and business development.

Olam, which said it had reaped a "significant gain" on its Australian disposal, has yet to reply to an request for further information on the South Africa deal.

'Completely dried out'

However, the company had also seen a drop in grain volumes thank to a "choice which has been fostered upon us", Mr Shekhar said, highlighting the "Ukrainian-Russian crisis".

In the April-to-June quarter, "certainly, that part of the volume has not happened which is obviously a concern," he told investors.

"The Ukraine business has completely dried out in the last four months and that is still a concern for us for the next year."

In fact, Ukraine's overall grain exports in June and July, the first two months of 2014-15, rose 48% to 4.7m tonnes, according to agriculture ministry data, although the country's unrest, and in particular the movement of pro-Russian rebels towards the port of Mariupol, have raised market concerns.

The comments add Olam to agriculture groups such as egg producer AvangardCo, US-based Cargill and poultry group MHP reporting some losses to the Ukraine crisis.

Mr Shekhar added that the Olam "would like to stay on a Russia - it's an important part of our business so the Russian business is still happening".

'Serious issue'

While Olam highlighted that its West African flour milling business had performed better than expected, it highlighted the potential threat there too should the ebola epidemic spread beyond current epicentre, in Sierra Leone, Liberia and Guinea, to which is has only small investments.

In Nigeria, where six people have died of the virus, Olam has "very significant exposure in operations", including in milling, chief executive Sunny Verghese said, adding that the group had imposed a series of measures to protect its own staff and products.

These included a ban on travel in the three most affected countries, and travel to Nigeria "only if it is absolutely required," Mr Verghese said, adding that the group was holding daily "crisis committee" meetings on ebola, with further in-country sessions.

"It is a serious issue and requires to be treated very seriously," Mr Verghese said.

Market reaction

The comments came as the group expanded on its results, which showed a drop in headline earnings of 44% to Sing$31.8m for the latest quarter, reflecting one-off charges such as a loss on disposal of timber assets in Gabon.

Mr Verghese said he was "pleased" with Olam's progress in revamping itself in line with a strategy of debt reduction and operational shake-ups which was drawn up after the group was targeted by short-selling group Muddy Waters.

After the results, Maybank Kim Eng termed the performance "in line" with expectations, and restated a "hold" recommendation on Olam shares, which it said were trading at a 15% premium to those in comparable companies.

However, OCBC restated a "sell" rating on the share, for which it estimates Sing$2.38 as fair value, saying that "current valuations appear slightly stretched".

Olam shares on Monday closed down 2.6% at Sing$2.58 in Singapore.

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