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: 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 to stay prudent, according to group CEO Sunny Verghese at the company’s results briefing on Feb 27.
Divestment of Olam Agri
Verghese, who co-founded the company nearly 40 years ago, stepped down as group CEO on April 27 but will remain CEO of Olam Agri, one of the business units, which is being divested and is in the process of being acquired by Saudi Agricultural and Livestock Investment Company (Salic).
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On April 16, the company announced that it had finally obtained regulatory approvals from all necessary 21 jurisdictions for Salic to purchase a 44.58% stake in Olam Agri. The deal was completed on April 27, which means Salic now owns 80.01% of Olam Agri and will also have the option to purchase the remaining 19.99% through a call option.
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 and cites three reasons to buy the counter.
The first reason for Yon’s view is the approval of the transaction with Salic. Pointing out that the development removes 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.
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The way Yon sees it, investors find it challenging to understand and value Olam’s business because multiple exceptional items are reported each year, disrupting core earnings. Hence, the Salic transaction will improve investors’ understanding of Olam.
In addition, Yon expects the deal’s deleveraging to reduce financing 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 upon completion of the 44.58% stake, and further to 1.17 times upon completion of the remaining 19.99% stake.
Trading at steep discount
Another reason for Yon’s view on buying Olam is that the company is trading at a “steep” P/B discount of 0.57, suggesting failure to deliver on 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 the Arise and Mindsprint businesses to contribute roughly 15 to 17 cents per share in special dividends, and their expected completion in 1H2026 and 3Q2026 to be re-rating catalysts upon the distribution announcement.
Yon adds a caveat, noting that capital allocation will depend on management’s decision regarding the perpetual securities due in July 2026, with repayment or refinancing to be assessed closer to maturity, taking into account progress on ROG divestments.
Based on sum-of-the-parts valuation, Yon values Olam at $1.35 per share or 0.7 times P/B. This represents a 30% upside to April 23’s closing price of $1.04.
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For Yon, with the successful sale of Olam Agri, Olam can resume its path of deleveraging, 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 bird that comes later catches the nice, fat worm. Is Olam ripe for the picking?
