Olam’s operating profit crashed 29% to $32.2m in Q1

Its hazelnut business was the main drag.

Olam reported a muted start to FY15 after its operating profit crashed 29% year-on-year to $32.2m, due to adverse price movement in its hazelnuts and dairy business, coupled with execution challenges in upstream dairy.

The group’s bottom line was impacted by a sharp drop in sales volumes, as a result of the disposal of the Australian grain business. According to Barclays, Olam’s business optimization strategy induces short term pain for long term gain, and is in line with the company's strategy to exit low margin businesses and optimize its working capital structure.

The report also noted that the next two quarters should see a strong rebound in volumes due to seasonality.
“The main focus for investors in the near term will likely be Olam's ability to follow through on its strategic plan, particularly on adding cash and capital reserves to the company, in our view, as gearing has not improved materially since the beginning of the program,” noted Barclays.

Here’s more from the report:

Hazelnuts impacting margins in the short term: Poor performance at the hazelnut business was a result of weather-induced raw material shortage in Turkey, the largest hazelnut producer in the world, with more than 75% market share, which led to high procurement cost and depressed margins. 

Although this highlights the risk of the nut processing business without upstream integration, Olam's expertise and scale in the nuts business enables it to weather price volatility in the short term.

Strategic plan execution, cash flow, gearing return in focus: The 18 announced initiatives to release cash of S$948mn is S$500mn short of the FY16 target. 

While we are still seven quarters away, Olam has been picking the low hanging fruits and must now continue to creatively reorganize its business to generate higher margins. Despite the cash generating initiatives completed in the past three years, net debt to equity has remained elevated at 185%.