Olam may need to change where it lists to convince on reorganisation

By David Whitehouse
Posted on Wednesday, 12 February 2020 14:18, updated on Thursday, 13 February 2020 06:17

Sunny Verghese, co-founder, CEO of commodities company Olam International. /SIPA/AP

Olam’s plan announced in January to separate its operations into food ingredients and global agri-business units is a step forward in improving transparency.

The company, which trades in Singapore, says it may later list the units as two separate entities. A new venue may be needed to convince investors that Olam is serious about improving financial disclosure.

Olam operates in 25 countries across Africa, as well as in the Middle East and South America.

The company’s current structure, with five business lines across many different products and geographies, means that “many investors find it difficult to understand the group’s business fundamentals,” says Leonard Law, a credit analyst at Lucror Analytics in Singapore. Creating two separate businesses would improve the overall level of disclosure and allow investors to choose which part to invest in, Law says.

Shares in Olam have fallen since the plan was announced on Jan 20. Law argues that Olam’s listing in Singapore does it no favours in terms of transparency.

  • Disclosure levels from Singapore-listed companies are weaker and less consistent compared with Hong Kong, he says.
  • The Singapore exchange also appears to lack the tools to penalize directors for their disclosure breaches, he argues.
  • The company could help investors with greater disclosures on operating and accounting metrics, including those for margin accounts, inventories, asset valuations, bank lines and joint ventures, Law says.

Weak corporate governance

The long-term outlook for food and agri-business is attractive, due to rising demand from a growing global population, increasing urbanisation and affluence, Law wrote in research published by Smart Karma on February 6.  He says the reorganisation plan will “help address some of the concerns regarding the company’s complexity and low transparency.”

Yet Law argues the company’s debt is high risk due to low margins and high volatility in the commodities supply-chain industry, high leverage and low cash flow visibility. The company will find it hard to improve cash flows, he says.

Corporate governance at Olam is rated as “weak” by Lucror Analytics.  This takes into account:

  • A “large and unwieldy” board, whose members “lack agricultural trading experience”;
  • Aggressive accounting policies; and
  • Poor regulatory oversight in Singapore.

Olam’s gross debt was almost eight times its earnings before interest, taxes, depreciation and amortization (EBITDA) in September.

Even this level may be an optimistic one. According to Law’s research, liquidity is very weak, as the company needs short-term working capital and depends on banks to extend credit lines.

  • Law notes that the company subtracts the value of liquid inventories and secured receivables from total gross debt.
  • “We are less confident that inventories and receivables can be quickly liquidated in times of crisis,” he wrote.
  • As inventories are used as inputs for its mid- and downstream operations, “the fire sale of inventories to raise cash would adversely impact profitability.”

Olam’s main shareholders are Temasek Holdings with 54%, and Mitsubishi Corporation with 17%. As long as Temasek continues to hold a majority, there’s no risk of Olam not being able to refinance credit lines, Law says.

But bondholders would be exposed in the event of a change of control.

  • Law points to the absence of protective clauses in the indenture, which might mean losses if ownership of Olam changes.
  • He cites the example of bondholders in Neptune Orient Lines who took losses after Temasek divested the business to the financially weaker CMA CGM.

Bottom Line: While Olam remains listed solely in Singapore, suspicions will linger that investors are not getting the full picture.

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