February 16, 2012

 

Olam Q2 profit falls 12% on weak cotton, timber demand

 

 

Olam International Ltd., the commodity supplier partly owned by Singapore's Temasek Holdings Pte, said Q2 net income dropped 12% because of waning demand for cotton and timber products.

 

Net income slid to SGD128.5 million (US$102 million) in the three months ended December 31 from SGD145.4 million (US$114.59 million) a year earlier, Singapore-based Olam said yesterday. Profit was higher than the SGD114.3 million average estimate of three analysts surveyed by Bloomberg. Sales rose 11% to SGD4.5 billion (US$3.55 million).

 

Earnings were dragged down by industrial raw materials, which saw net contribution drop 29% in the quarter to SGD35.1 million (US$27.66 million) from a year earlier. The food staples and packaged food segment expanded 19% in volume and 12% in revenue, driven by rice and grain, Olam said.

 

"Olam's earnings are more resilient than peers, thanks to its recession-proof portfolio," Lee Wen Ching, a Singapore- based analyst at CIMB Research Pte., noted. "Growth from edibles offset weakness in the economically sensitive industrial raw materials segment" which includes cotton, wool, rubber, timber and fertiliser.

 

Olam suffered a decline in cotton demand in 2011 as slowing economic growth eroded consumption. Rivals Glencore International Plc and Noble Group Ltd. said losses in their cotton businesses eroded profit.

 

"This was an unusual period," Olam Chief Executive Officer Sunny Verghese said in a briefing in Singapore. "Most of the sector has underperformed."

 

The cotton and wood products businesses continue to face strong headwinds, Olam said in the earnings statement.

 

Olam shares fell 1.2% to SGD2.58 (US$2.03) as of 12:53 p.m. in Singapore, compared with the 0.8% gain in the Straits Times Index.

 

Global cotton demand will be 2.6% less than forecast in November as economic growth prospects dim and polyester gains market share, the USDA said December 9.

 

Glencore, the world's biggest publicly traded commodities supplier, posted an US$8 million loss in its agricultural business because "extreme volatility" in the cotton market made hedging ineffective, it said on February 7. Hong Kong-based Noble also attributed the loss in its third quarter to its cotton business and carbon-credit trading.

 

Olam's cotton business "has outperformed most players in the industry," Verghese said. "Risk is now behind us" as cotton prices stabilise and fewer customers default.

 

In the food segment, the dairy and sugar businesses are expected to underperform, Olam said.

 

Olam expects to see a "softening" in the sugar market in the second half, Verghese said. "Trading conditions would probably be a little more volatile than what we've seen in the first half."