From China to Cameroon and Costa Rica, Olam International has blazed a path of success as a leading agricultural products and food ingredients company – and it has recently upped the ante. The announcement late last year by its CEO, Sunny Verghese, that the company has more than doubled its long-term net profit forecast to $1bn by 2016 shows that while it may be based in the relatively tiny city-state of Singapore, Olam is very much on an upward trajectory around the world.

“We had a six-year forecast beginning in 2010 and ending in 2016, and we executed much better than we expected,” says Mr Verghese, in an interview with fDi Magazine. “We grew our revenues by 20.5% and we increased our earnings from $277m in 2010 to $332.3m in 2011. We have exceeded our two-year milestones cumulatively by 103%, leading us to roll over the plan by one year, from 2015 to 2016. So over the next five years we expect increases in our after-tax earnings to reach almost $1bn by 2016.”

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All over the world

Olam, which is best known as an agricultural supply chain business, has achieved extraordinary success through its direct presence in 65 countries where it sources 20 products and supplies them to more than 11,000 customers. “In the 22 years that we have been in business, we have seen commodity up-cycles and commodity down-cycles,” says Mr Verghese. “We’ve also seen a couple of recessions, including the 2008 global financial crisis. So our business has performed well across these economic and commodity cycles.”

Its competitive advantage lies in its expansive geographic presence. Data and analysis provider Business Monitor International (BMI) reports that Olam’s diversified presence across 14 platforms and 18 agricultural commodities, compared to the industry’s average of five, in the various countries it operates, has mitigated individual product and country risk.

“Given the tremendous growth in food consumption in the emerging markets of Asia and Africa, we believe that Olam's geographical distribution of revenue should be a strong foundation for revenue growth in the long term,” says Sarah Wong, BMI’s Asia commodities analyst.

Recession-proof?

Olam has been operating well ahead of the curve, and despite a possible double-dip recession affecting some developed markets this year, it seems that having two-thirds of its revenue streams coming mainly from Asia and Africa, with 77% by revenue in recession-resistant food sectors, according to data from BMI, means Olam should weather the storm relatively well. Indeed, projects identified by fDi Markets greenfield investment database shows that between 2003 and 2011, only two out of 13 greenfield investment projects were in Europe, with the rest based in Asia and Africa. Furthermore, Nigeria and Côte d’Ivoire captured the top four most capital-intensive projects worth a combined $408.8m.

“We believe that the world population, which is now 7 billion, will increase by 2.5 billion people to 9.5 billion by 2050,” says Mr Verghese. “Some 2.3 billion of this growth will happen in emerging markets in Asia and Africa. This will result in growing demand for food and a growing middle class, and so we are disproportionately invested in these growth markets in both regions. Within these markets we are investing in upstream plantation activities, in the supply chain sourcing and ordination trading activities, in the midstream agricultural processing and manufacturing activities, and downstream distribution.”

Hard road ahead

While it may be tempting to assume that Olam’s innovative adjacency business model is foolproof, BMI points out that one of the company’s chief weaknesses stems from the fact that commodity supply chain managers typically require high levels of debt in order to finance their heavy working capital requirements.

“Like other agri-companies, Olam will continue to be increasingly subject to price volatility in the agri-commodity markets,” says Ms Wong. “Given the growing speculative interest in this previously less accessible asset class, this trend should only lead to a higher correlation with financial markets and, by implication, global economic developments. Thus, going forward, we would expect companies such as Olam to be more and not less exposed to global economic shocks.”

A second crucial factor that BMI identified is that as the company grows its own sugar, it still remains susceptible to poor weather that could decrease yields. Therefore this could force the company to buy more sugar from other suppliers to maintain production levels.

“Another significant risk towards Olam’s growth outlook is that cash flow is currently negative, largely due to a change in accounting methods for the inventory in 2011, and we note that large debts will have to be paid off in the next five years,” says Ms Wong.

“That said, we note that its interest coverage ratio as well as debt to earnings before interest, taxes, depreciation and amortisation have improved in recent years, which should ensure that it is still on its way to repaying its debts. The management has emphasised that it will not rely on diluting equity to raise funds. According to company reports, it also expects operating cash flow to only turn positive by 2014. Indeed, we flag up Olam’s poor cash position as a factor which would drag on sustainable long-term growth.”

Varied diet

Nevertheless the company’s CEO remains confident in Olam’s ability to maintain a consistent performance, despite these challenges. “We have performed reasonably consistently because we have a differentiated strategy,” says Mr Verghese. “We are differentiated with our customers as we offer them various value-added services and solutions, and this gives us a higher share of the customer’s wallet. We also have defensible niches in agricultural commodities such as edible nuts, wool and dairy, that the other major commodity companies do not participate. None of our competitors’ portfolios are as differentiated as ours.”

Olam’s aggressive merger and acquisition (M&A) activity in recent years illustrates its intention to face its challenges head-on. Its capital expenditure is at its highest level so far, almost doubling from $132.5m in 2010 to $258.3m in 2011, according to data from BMI. Moreover, Olam’s company report shows that it expects 65% of its growth in earnings to be driven by organic businesses and 35% by M&As. Some 22 years on from its inception, results reveal that Olam is still firmly on its growth path, and certainly far from reaching its apogee.