Bloomberg News

Olam Profit Declines on Lower Prices, Cotton, Wood Demand

May 15, 2012

Olam International Ltd. (OLAM), the commodity supplier partly owned by Singapore’s Temasek Holdings Pte, reported a 23 percent drop in third-quarter profit as prices fell and demand for cotton and wood products waned.

Net income fell to S$98.7 million ($78.6 million) in the three months ended March 31 from S$127.3 million a year earlier, Singapore-based Olam said today in a statement. That compares with the S$97.3 million median of three analyst estimates compiled by Bloomberg. Revenue fell 11 percent to S$4.2 billion.

Olam, which supplies 20 agricultural goods from cocoa to rubber, follows Wilmar International Ltd. (WIL) and Noble Group Ltd. (NOBL) in posting lower year-on-year earnings as volatile commodity prices crimp profit. Olam is one of the world’s three biggest suppliers of cotton, which on average fell 49 percent in the quarter from a year earlier.

“The cotton business, particularly our Australian and U.S. origination and marketing operations, continues to face demand decline and illiquidity across many of its markets,” Olam said today. Revenue fell due to lower commodity prices.

Olam shares fell 1.5 percent to S$2 in Singapore, before the earnings announcement. The stock has dropped 6.1 percent this year, compared with the 9.3 percent gain in the benchmark Straits Times index.

New Prices

Cotton farmers will take time to adjust to new prices, Chief Executive Officer Sunny Verghese said at a briefing in Singapore today. Olam will maintain its share of the cotton market, he said.

“Its industrial businesses may take another quarter or so to recover,” Nomura Holdings Inc. analysts Tanuj Shori and Vishnuvardana Reddy wrote in a report dated May 4. “Olam actually has done well, especially in the food-related business.”

Olam’s industrial raw materials division, which accounted for 23 percent of net contribution in the year ended June 30, includes cotton, wool, rubber, and wood products. Net contribution from this segment fell 49 percent in the quarter to S$33.2 million.

Cotton procurement fell short of expectations in the third quarter as U.S.-based farmers sold less of the raw material, Chief Financial Officer Krishnan Ravikumar said at the briefing.

“Anticipated volumes from both growers and customers are likely to be lower, or may get postponed into the next financial year,” Olam said. “We have also encountered enhanced counterparty risk in some Asian markets.”

Cocoa, Coffee

Olam’s confectionery and beverage segment, which procures cocoa and coffee, saw net contribution rise 25 percent in the quarter from a year earlier. Its food staples and packaged foods business, comprising rice, sugar, and grains trading posted an 18 percent gain in net contribution.

The division selling nuts, spices, and beans recorded a 38 percent gain in net contribution from a year earlier and a 15 percent drop in revenue, Olam said today.

Olam is buying assets and developing new projects to help boost annual profit after tax to $1 billion by 2016, a goal that was reaffirmed by Chief Executive Officer Sunny Verghese in March. The company posted profit of S$429.8 million for the year ended June 30, 2011.

The company announced in the quarter it plans to invest in a $183 million venture comprising 28,000 hectares (69,000 acres) of rubber plantation with the Gabon government. Olam will hold 80 percent of the venture, it said in March.

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan in Hong Kong at rkeenan5@bloomberg.net


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