Free polls from Pollhost.com
Should we set a cap on bankers' salaries to prevent future crisis?
Yes! Get the bastards! No! They deserve every penny!   

Saturday, October 01, 2005

Olam @ 1.39 ( Supply Chain / Singapore ) 13 comments



(P.S: Sorry for any disturbances the advertisements above may have caused you)

Main issues

1.High valuation risk at >26X trailing PE

2.Considerable operational risks, given fluctuating commodities prices and lack of hedging options for many

3.Considerable and continuous borrowing to fund working capital

4. Low dividend yield


I had been watching this stock for some time and wondering when its upward momentum would stall. It seemed to me there were quite a few risk factors involved and I don't understand how it can be trading at >26 times trailing PE, based on the latest results just released in late August (which means forward PE is not that relevant here since we're just at the start of a new financial year).

Firstly there is valuation risk. The nearest comparable would be Noble which is trading at 7-8 times PE, and whose revenue base and track record as a listed company is better established than Olam's. Here of course the comparison is not quite apple to apple, since they are supply chain managers dealing in different commodities: Noble in primarily industrial, Olam in food. One may classify the former's business as being driven by countries' investment needs, the latter's business as being driven by their consumption needs. At this stage of the global business cycle, however, I would think both sectors are generally buoyant. So why the pricing discrepancy?

Secondly, there are a few key business risks to consider. As listed down in Olam's prospectus, a key risk is price fluctuations in the commodities they deal in. Hedging options are not available for a number of commodities, such as cashews, rice, dairy products. Weather risks would have to be incorporated for agricultural-linked stocks such as this; just look at how Zhongguo Powerplus's price was affected by the floods in China. And how about interest rate risk? Olam's business runs on short-term credit and about 40-50% of its operating profit goes to interest payments, which could escalate and limit growth if global rates rise as they are likely to do over the coming year. Not to mention developing country risk, where Olam mostly source their food products from, although the diversified scale of their operations mitigates this risk.

Thirdly, there is balance sheet risk. It is interesting to note that for the last three years (2003-2005) Olam has been incurring negative operating cash flows, and these are substantial too: S$74M, S$188M, S$713M in 2003, 2004 and 2005 respectively. For a trading company this may be acceptable since it is clear that the company re-invests the profits into new inventory on an on-going basis. But nevertheless watching inventory double while full-year revenue only grows 30% must be a negative sign under any circumstances. Its S$200M cash from the IPO has all been spent and it even borrowed an additional S$500M to finance its ballooning S$800M working capital (increase in receivables, inventory). That was really aggressive and one has to worry about its huge short-term debt of S$1.2B. One may compare it with Noble's capital structure which takes in a considerably lower proportion of short-term bank debt (being able to establish credit terms, probably interest-free, with suppliers) and also keeps substantial cash reserves.

And of course, since Olam's management seems keen to re-invest profits, it has only declared a miserly dividend of 2 cents for the year, or less than 1.5% yield. Not particularly rewarding for a stock trading at such high multiples.

I mentioned at the start that I was wondering when the stock's recent momentum would stall. Let me do a bit of market timing and stick my neck out to say it is now. Fund managers, in particular Newton Investment Management, have been buying up the stock these few months, providing the price impetus. It has reversed its position and started to sell recently. Newton, if I remember correctly, were also buying into Noble earlier this year driving its price up to 1.80, and when their buying stopped the stock sank and settled at 1.40-1.50. I'm thinking the fall could be worse for Olam.

 

 

13 Comments:

Blogger Joe Muka said...

Hi, Saw your site late night. Some of your ideas I may use for my site about residential voip It's kind of a boring topic...I liked some of your info.

10/03/2005 10:41 PM  
Anonymous Anonymous said...

Hey... Interesting post on free voip software. By the way... Just found this resource where you can post your own articles on free voip software - if you have something you want to share with the world. Besides, at the same time you'll get a link back to your own site on anything concerning free voip software - or whatever else you'd like... why don't you check it out for yourself now...

10/04/2005 5:03 AM  
Blogger Mike said...

well if you look into the recent discussion of letting retailer like us have ever to use unit trust as margin. More and more encouragement of investment.

More encouragement of having debt, it seem that it we are heading to some bubbles.

Olam definitely not worth that price. We just do not know when the invisible hands will stop. This is a momentum play.

10/05/2005 7:36 AM  
Blogger DanielXX said...

Hi mike,
Apparently the momentum has halted and Olam might just retrace its steps backwards.

Whichever small investor going in now is taking a big risk.

10/08/2005 12:11 AM  
Anonymous Anonymous said...

Yo, This blog is pretty neat. You should check out mine sometime. It pretty much covers permission based email marketing related stuff.

10/22/2005 6:13 AM  
Blogger JT said...

Great Blog! A real pleasure to read! Do you know that Traffic Portals will really boost your conversion rates and generate exclusively yours leads? We offer VOIP webinars - Marketing Courses Using Web Conferences about Traffic Portals I also have a website that talks about various high profile topics such as Retirement and includes an eBusiness Directory. I also would like to tell all of you reading this terrific blog about Retirement that should you be in need of a terrific host for a serious eCommerce Website that www.Kiosk.ws is Awesome Hosting value! They have the best online support team for all of your technical questions and a 3 minute emergency pager too. Looking to start your own affiliate program? They have an excellent script for you! They give you $70,000 dollars worth of software to build just about any type of e-commerce website you need! Go check it out if you get a chance. You can make more money than you spend and Create Free Will for Yourself! Again, Great Blog! Thanks. The info on Retirement Sooner was very informative!

10/24/2005 11:14 PM  
Blogger Joe Muka said...

Just checking out blogs for ideas to add to my site about cisco voip phone and other voip stuff. (I know its a boring subject) I liked your site

10/25/2005 8:58 PM  
Blogger George said...

service business softwareCreate Your Own MoneyMaking Info Productsservice business software

10/29/2005 8:59 AM  
Blogger VoIp Solutions said...

I just came across your blog and wanted to drop you a note telling you how impressed I was with the information you have posted here.
I also have a web site & blog about review voip so I know what I'm talking about when I say your site is top-notch! Keep up the great work!

10/29/2005 10:18 PM  
Anonymous Anonymous said...

I have heard rumors that some large players are looking to buy Olam shares. They think the company might make them a killing probably. We saw a similar thing. In India, Blackstone offered to buy @ 20% above market a textile house in India.
Is Olam going to face a super upward movement?
what do u think ?

8/23/2007 6:34 PM  
Anonymous Anonymous said...

will it breach 4.5 in the short run..its moving up fast in the last two days..each day went up about 5 %

i think its a cheap buy judging by the good result expectations..and mainly due to interest from some big sharks ...some billionaires seem interested in it ..so goes the grapevine

8/23/2007 7:34 PM  
Anonymous Inventory POS System said...

I like your article and it really gives an outstanding idea that is very helpful for all the people on web.

1/01/2011 5:25 PM  
Anonymous Inventory Management Software said...

Thanks for sharing your post and it was superb .I would like to hear more from you in future too.

1/15/2011 4:36 PM  

Post a Comment

<< Home