In January 2020, the company announced a restructuring to “unlock value” for shareholders. This involved organisational restructuring of its business units as well as divestments of businesses and assets. The company is now segmented into three units, mainly Olam Food Ingredients (ofi), Olam Agri and Rest of Olam Group (ROG).
Since the announcement, the company has distributed a total of 39.5 cents in dividends from FY2020 to FY2025 (interim). The company did not declare a final dividend for FY2025, mainly for reasons of prudency according to group CEO Sunny Verghese at the company’s results briefing on Feb 27.
Verghese, who fo-founded the company nearly 40 years ago, will be stepping down as group CEO on April 27, but will remain as CEO of Olam Agri, one of the business units, which is being divested and in the process of being acquired by Saudi Agricultural and Livestock Investment Company (SALIC).
On April 16, the company announced that it has finally obtained regulatory approvals from all necessary 21 jurisdictions for SALIC to purchase a 44.58% stake in Olam Agri. After the completion of this deal, SALIC will own 80.01% of Olam Agri and will also have the option to purchase the remaining 19.99% through a call option.
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With the divestment of Olam Agri, Nicholas Yon from Lim and Tan Securities thinks Olam is “now ready for harvest”. In a non-rated report issued on April 24, Yon values Olam at $1.35, citing three reasons to buy shares in the counter.
The first reason for Yon’s view is the approval of the transaction with SALIC. Pointing out that the development is removing a “key overhang”, Yon states that it simplifies Olam’s structure while de-risking the balance sheet which would also prompt a re-rating of ofi and ROG’s divestment pipeline.
The way Yon sees it, investors find it challenging to understand and value Olam’s business as there are multiple exceptional items reported yearly that disrupts core earnings and hence, the SALIC transaction will improve clarity for how investors can understand Olam.
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In addition, Yon expects the deleveraging from the deal will reduce finance costs by around $200 million. He calculates that on a pro-forma basis, net gearing for FY2024 will reduce from 2.79 times to 1.29 times on completion of the 44.58% stake and further reduce to 1.17 times on completion of the remaining 19.99% stake.
The next reason for Yon’s view to buy Olam is that the company is trading at a “steep” discount of 0.57 times P/B, implying failure to deliver the restructuring story. Highlighting that Olam just sold Olam Agri at 3.5 times P/B and that the latest ROG transactions were above book value, he thinks Olam’s valuations are “unjustified”. “As such, there now represents a wide margin of safety for investors, and we think every restructuring milestone from here should narrow the discount,” he writes.
Thirdly, Yon notes that management, including new ROG CEO “turnaround specialist” Gautam Wadhwa, has signalled that proceeds from ROG divestments will be returned to shareholders via special dividends. Yon expects the transactions for ARISE and Mindsprint businesses to contribute roughly 15 to 17 cents per share special dividend and their expected completion in 1H2026 and 3Q2026 to be re-rating catalysts upon distribution announcement.
Yon adds a caveat, mentioning that capital allocation will depend on management’s decision regarding the perpetual securities due in July 2026, where repayment or refinancing will be assessed closer to maturity, taking into account progress in ROG divestments.
Based on sum-of-the-parts valuation, Yon values Olam at $1.35 per share or 0.7 times of P/B. This represents a 30% upside to April 23’s closing price of $1.04.
The way Yon sees it, with the successful sale of Olam Agri, Olam can resume its path of de-leveraging, divestment of ROG and spinning off ofi. For later investors in Olam, the path to gains is presumably clear. For early investors, relief is in sight.
In stock investing, sometimes the early bird feeds on scraps while the later bird catches the nice fat worm. Is Olam ripe for the picking?
