RPT-UPDATE 2-Olam, under Temasek's gaze, shifts to slower growth path

Thu Apr 25, 2013 7:49pm EDT

* New strategy to break from heavy debt-fuelled spending

* Aims to turn free cash-flow positive in 2014, one year ahead of target

* Temasek says comfortable with Olam's credit position

* Olam to scale down operations in some small businesses

* Olam now listening to investors, aiming to show results -analyst

By Eveline Danubrata and Anshuman Daga

SINGAPORE, April 25 (Reuters) - Olam International Ltd , propped up by Singapore state investor Temasek Holdings after worries mounted over its high debt, bowed to investor pressure and said it will nearly halve its capital spending over the next three years and trim its businesses.

The Singapore-based agricultural commodities company, which came under attack from short-seller Muddy Waters last November and was forced to raise cash as its stock and bond prices tumbled, has been urged to rein in its global expansion plans and generate more cash.

Olam - whose new top shareholder Temasek has put its own reputation on the line and wants a secure foothold in the commodities sector - said the more prudent approach would assure its future.

"We feel that we have a very clear plan and we feel we will become a much stronger company," Olam Chief Executive Officer Sunny Verghese told Reuters on the sidelines of a news conference, where he announced the company's shift in strategy.

Olam is aiming to be free cash-flow positive by the year to June 2014, one year earlier than previously forecast, and delayed a target of reaching $1 billion in net profit by 2016.

It will also seek to cut its stake in a Gabon fertiliser plant, its biggest investment, which has been delayed by about a year.

After five months of firefighting since Muddy Waters issued scathing criticisms of Olam's business practices and debt levels, sparking a slide in its stock and debt prices, Verghese said he thought the worst was over.

Muddy Waters, however, was unconvinced.

"Olam is now saying the right things, and one hopes they're sincere. However, we question whether this is too little, too late given Olam's existing debt load and asset quality," the short-seller said in an emailed statement.

TEMASEK WATCHING

Mandated by the Kewalram Chanrai Group to start Olam in 1989, Verghese spearheaded the company's expansion beyond trading, into the production and processing of agricultural commodities from cotton to coffee to cashew nuts.

Olam's fortunes are increasingly tied to Temasek, which became its biggest shareholder with a 24 percent stake, up from 16 percent, after subscribing to a $712.5 million cash call in January.

In a brief statement, Temasek said it was comfortable with Olam's credit positions and its longer-term prospects.

The state investor has been increasing its exposure to the global commodities and energy sector.

"Temasek is looking at resources with a long-term view," said Song Seng Wun, a regional economist at CIMB Research.

"Commodity prices may be wobbling all over the place now, but when the global economy returns to a 'normal growth' path, then demand for resources will surely pick up. So it is cheaper for Temasek to be early."

Olam had promised Thursday's strategic review more than two months ago, as it sought to reassure investors and control the damage from worries stirred by Muddy Waters' allegations, which triggered a 22 percent drop in Olam shares in ensuing weeks and pushed its bond prices lower.

The strategy of adding on more production and processing capabilities had loaded Olam with debt as it bought flour mills and other assets, including a dairy business in Uruguay and almond assets in Australia.

But the company signalled it will moderate its acquisitiveness, cutting planned capital spending for the period from 2014 to 2016 by S$1 billion ($804 million) or more, to between S$1.2 billion and S$1.6 billion. That compares with an earlier spending plan of S$2.2 billion to S$2.6 billion.

"Olam wants to first let the numbers show there is delivery before they move back to the original path of growth by M&A," said Roger Tan, head of SIAS Research.

"Olam has learned from the Muddy Waters episode the importance of regular communication with investors, especially because of their complex business model."

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.