The Kewalram Chanrai Group, one of the oldest international companies in Africa and Asia with more than 150 years of trading history, established Olam in 1989 as a means of obtaining foreign exchange for its businesses in Nigeria.
Similar to a mustard seed sown in Nigeria, the company which started as a modest cashew exporter has in the last thirty years grown into a giant tree, playing a leading role the agri-space value chain, from sourcing, to processing, storing, transporting, shipping, distributing, trading and marketing various agricultural products.
From a single operation in Nigeria, Olam grew into other markets starting from within West Africa then to East Africa and then India. With a total investment of $1.5 billion, Olam is Nigeria’s largest non- oil exporter bringing in foreign exchange to the tune of about $300m majorly from cocoa, cashew and Sesame.
Sunny George Verghese, now CEO and Co-founder of Olam, was saddled with the responsibility of starting the non-oil based export operation of the group. Earlier, Verghese had helped the privately-owned Indian conglomerate implement a backward integration that enabled its Nigerian cotton factory source raw material locally.
The company flourished exporting cashew to India where it was processed and expanded into the export of cocoa, cotton, and shea nuts from Nigeria.
Four years after it was founded, Olam expanded operations into other markets following the deregulation of agricultural commodity markets.
Olam’s strategy was based on finding near adjacencies and migrating to businesses that allowed for customer-sharing or supplier-sharing or cost-sharing or capability-sharing with its existing operations. The success of the business led to Olam’s listing on the Singaporean exchange in July of 1995.
A year after going public, the Singapore Trade Development Board (now International Enterprise Singapore) invited Olam to relocate their entire operations from London to Singapore.
Olam had operated in London as Chanrai International Limited but with the relocation, to Singapore, the Group’s agri-business was reorganised to be wholly owned by Olam International Limited in Singapore.
As perks, Olam was granted a concessionary tax of 10 percent following the award of the Approved International Trader status (now called the Global Trader Program) by the Singapore Government. The concessionary tax was halved in 2004.
Olam continued its expansion across Europe, Africa, Asia, and South America. Today Olam International Limited operates in more than 50 countries across the globe.
The shareholding structure shows that Temasek Holdings with 53.5 percent is majority stakeholder, others are Mitsubishi Corporation 17.4%, Kewalram Chanrai Group 7.0%, Olam Management 6.3%, and Other Institutional and Public 15.8%.
Group’s financials show mixed performance
Revenue of Olam surged 54.2percent to S$30.5 billion (Singaporean dollar) in the full year 2018 from S$19.8 billion five years earlier.
However, the agro-giant has been struggling to sustain a positive profit growth trajectory since incurring S$114.9 million losses in 2015.
The regional distribution of top-line showed the 43percent of the Group’s sales revenue came from Asia and the Middle East; 25percent from Europe; 17percent from America and 16percent from Africa.
Profit tanked 40percent in the full year 2018, slowing to S$347.8 million from S$580.7 million a year earlier, after a 65percent rebound from S$351.3 million in 2016.
The company’s profit after tax and minority interest declined 8.5percent to S$230.3 million in the first six months of 2019, from S$251.9 million a year earlier on the heels of higher depreciation and amortisation, higher net borrowing cost and exceptional losses.
The agro-business giant noted that the adoption of Singapore Financial Reporting Standard (SFRS) which took effect January 1 also weighed on bottom-line; saying excluding exceptional losses and the impact of SFRS, net income would have jumped 3.6percent to S$261 million.
Olam’s sales revenue grew 16.2percent to $ 15.9 billion from $13.7 billion realized in the preceding comparable period. Sales of goods spiked 40percent to 19.1 billion metric tonnes on increase in grain trading volume.
Also, earnings before interest, tax, depreciation, and amortization (EBITDA) jumped 14percent due to improved EBITDA from all segments except industrial materials, infrastructure, and logistics.
“We delivered a steady set of results amid growing political and macroeconomic uncertainties affecting most of our markets,” said Sunny Verghese, the Group’s CEO in a note to investors.
“We are making good progress in executing our new strategic plan, and also investing in several new initiatives to offer differentiated solutions to our customers”, he said.
Olam bettered performance in terms of cash flows and gearing. The firm generated positive cash flows to equity worth S$864.2 million half-year 2019 compared with deficit S$167 million posted last year, hinging it on the lower deployment of working capital.
A further dive into the company’s earnings report showed mixed performance across its four business segments.
While proceeds from food staples & packaged food and industrial materials, infrastructure & logistics rose some 38percent and 15percent respectively, cash from edible nuts & spices tanked 1percent and 10percent respectively.
Anantharaman Shekhar, Olam’s Chief Operating Officer, stated that the improvement recorded in gearing and free cash flows helped strengthen the group’s balance sheet.
“We are well-positioned for H2’19 as we approach the peak of the procurement season for several of our commodities with likely increases in working capital deployment”, Shekhar noted.
No slowing down on growth
In what came to many industry watchers as a surprise, Olam announced plans to acquire Dangote Flour Mills, Nigeria’s third-largest miller by market capacity.
In April, Dangote Flour announced an offer by Olam through Crown Flour Mills 5,000,000,000 issued shares at N130bn this has however been revised to N120bn amounting to N24.00 per ordinary shares following the adjustments.
For Olam, the acquisition of Dangote Flour Mill, which is currently been concluded is part of its strategic plan to be a major player in the flour and wheat milling industry.
The deal scheduled to be sealed in Q4 2019 could transform Olam into the biggest miller in Africa’s biggest economy with 43percent market share, a position currently occupied by Flour Mills of Nigeria Plc with 32percent, Olam’s crown flour mills currently has 24percent, Dangote Flour having 19percent share, Chagoury Group 11percent and Honeywell 10percent come fourth and fifth in market ranking, while others share the remaining about 4percent according to a 2016 research report by KPMG on Nigeria’s flour milling industry.
According to the United States Department of Agriculture (USDA), Nigeria is currently 11th largest importer of wheat in the world, bringing in the product worth $1.15bn annually.
To meet Nigeria’s 4.7 million metric tonnes wheat requirement of which the country only produces 60,000 metric tonnes, Olam has continued to support the research of wheat seeds that can grow in tropical conditions like Nigeria through its project in Senegal.
Ade Adefeko, vice president corporate and governmental relations, Olam Nigeria, in a response to BusinessDay’s questions said over the last 10 years, Olam has invested over N25bn to improve the productivity and efficiency of its mills noting that the company has remained committed to its backward integration program spread across the country.
It has also shown its preparedness to mitigate Central Bank’s restriction on access to forex for food importers by working with Wheat Farmers Association of Nigeria to improve their productivity and assure them of a guaranteed off-take for the wheat produced in Nigeria.
Backward integration program
Olam continues to participate in backward integration by setting up its Rice plantation and Mill and is the biggest investor in that value chain in Nigeria and one of the biggest off-takers of Nigerian agricultural production for crops like Cocoa, Sesame, Cashew, Wheat, Maize, and Soybeans.
It was the first Company in Nigeria to export hulled sesame to Japan as far back as 1995, establishing a state of the art multi-billion naira Sesame hulling plant in Sagamu, Ogun-State.
The Wheat milling business generates direct and indirect employment for 10 million Nigerians as it provides the raw material for Bread Industry worth more than 300,000 bakers, Biscuit industry, Noodles industry, and Pasta Industry. Wheat Bran forms a crucial input for the cattle rearing industry of Nigeria.
“Applying these across the combined manufacturing facilities and leveraging on economies of scale as well as strengthening branding would deliver improved operational metrics, including capacity utilization and extraction rates and cost efficiencies,” Adefeko said.
In 2013, Olam invested over N19bn in a 10,000-hectare farm with integrated mill which created employment for Nigerians producing 36,000 metric tonnes of rice (Mama’s Pride and Mama’s Choice brands) for the local market, with support for backward integration through an ‘outgrower program’ for rice farmers, among others.
The agribusiness company in 2017 made a $150m greenfield foreign direct investment in Animal Feeds and Day-Old-Chicks (DOC).
It also set up West Africa’s largest and most modern breeding and hatchery facilities to produce over 30m Broiler DOC annually. At full capacity, these DOCs will enable the production of 50,000 MT Poultry meat, thus reducing Nigeria’s (cross border) import bill by $125m.
Olam’s state-of-the-art Aquafeed line can produce 75,000 MT of high-quality, affordable extruded feed, which can support 60,000 MT of farmed fish production, this will help substitute frozen fish imports of $100-120m annually.
The company’s feed mills are currently providing a market for locally produced corn and soybeans over 350K MT, accounting for 25% of the total market arrivals. This investment:
Spurred a market for locally produced corn and soybeans such that for 2 years it ran its animal feed plants to manufacture poultry & fish feed largely on locally produced corn and soybean, making it one of the biggest buyers of locally traded corn and soybean accounting for 20% of the local corn & soybean market.
Will reduce Nigeria’s import bill by 200 million dollars every year based on a large number of broiler Day Old Chicks (DOC) we have produced, all of which have gone to substitute imported poultry meat.
“We estimate the broiler DOC we have produced has reduced imports by about 125 million dollars, in turn, creating between 150,000-200,000 jobs directly and indirectly and is enhancing rural livelihoods,” said in his response.
Management Outlook
As part of its 6-year strategic plan, 2019-2024 Olam aims at enhancing leadership position and capturing value from key emerging consumer trends. These trends include but not limited to increasing demand for healthier foods, traceable and sustainable sourcing, e-commerce and the rise of purpose brands.
Through this plan, the company plans to invest US$3.5 billion including maintenance CAPEX to strengthen businesses with high growth potential, while releasing US$1.6 billion by responsibly divesting certain businesses and assets lying outside the strategic priorities for this plan.
“We believe our diversified and well-balanced portfolio provides a resilient platform to navigate challenges in both the global economy and commodity market”, Olam said.
Going forward, the group expressed optimism for full-year 2019 performance despite political and economic uncertainties in the global economy.
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