Olam International

Citi Investment Research on 20 June 2012

THE firm yesterday announced the departure of its CFO Krishnan Ravi Kumar, Olam's CFO since 1996.

We believe Mr Ravi is pursuing a new career outside the agri-commodity sector. He will continue in his role till end-July.

The replacement: Olam's executive director Shekhar Anantharaman will take on the role as the executive director for finance & business development.

Mr Shekhar is among the founding team at Olam with 20 years at the firm, with tenures in finance, treasury, and operations at two of Olam's key segments - the edible nuts, spices & vegetable ingredients and packaged foods businesses.

The concern: While Olam has a deep management bench, investors will likely fret about this development somewhat given Mr Ravi's tenure and seniority.

Olam's aggressive growth pipeline in acquisitions and greenfield projects also means investors will be keen to track growth in management bandwidth post Mr Ravi's departure.

Global financial crisis (GFC) vs now: Its recent share buyback programme (which commenced on June 8, its first buyback ever with 20.1 million shares or 0.89 per cent of its issued shares purchased up to June 19) has helped somewhat.

Olam's valuation for its equity is close to that seen during the GFC in part due to the various difficulties that Olam (and the sector) has encountered in the past few quarters, as well as the increased gestation period on some of its fixed-assets linked investments (ie, it will take longer for growth to come from investments such as its US$1.3 billion greenfield fertiliser project in Gabon).

In contrast, Olam's debt is trading close to par vs large 40-50 per cent discounts seen during the GFC. Olam repurchased debt in H1 2009 during the GFC period, which helped mark the bottom for equity valuations then.

While it is not likely that Olam repurchases debt at current prices, Olam has more options in this cycle as it has lower leverage this time around, with adjusted net gearing of 0.4 times (or 1.9 times nominal net debt/equity) which leaves it room to fund further equity buybacks (it raised $740 million in new equity in June 2011).

Its current gearing level of 0.4 times is also favourable when compared to the 0.7 times in adjusted net gearing at end-FY08 during the GFC period.

BUY