Olam sees rebound in coffee prices after profits drop

Reuters   -  Rujun Shen and Lewa Pardomuan

* Profit dips on lower sales volume, commodity prices

* Olam "neutral" on robusta, "friendly" on arabica

* Olam maintains bullish stance on cocoa (Adds comments from briefing, recasts)

SINGAPORE, Feb 14 - Commodities trading firm Olam International Ltd posted a 12.5 percent drop in second-quarter profit on weaker sales and commodity prices, but said a rebound in coffee prices would boost the sector's performance for the rest of the year.

The Singapore-based firm, a leading global coffee supplier, said its coffee business was impacted by weaker prices, which slumped to multi-year lows last November.

Sunny Verghese, managing director and chief executive officer, said he was bullish on arabica coffee prices but neutral on robusta prices.

"We are neutral on robusta prices largely on account of the fact that there's a very large crop in Vietnam -- almost 28 million bags, which is our estimate," Verghese told reporters.

Unusually dry weather in top producer Brazil, which mainly supplies arabica beans, could cut output in the next crop to an estimated 50 to 51 million bags from 57 to 60 million, he added.

"Structurally, we believe that the demand/supply fundamentals is now in favour of a firming market," Verghese said, referring to the arabica market.

Benchmark New York arabica futures rallied to 9-month peak in early February on concerns over drought in Brazil, up from a more than four-year low hit in November when oversupply concerns weighed on prices.

Arabicas often influence the price of London robustas and typically trade at a premium to the hardier and more caffeine-rich beans, which are widely used in instant coffee. Vietnam is the top robusta producer.

London robusta futures rallied to a six-month high earlier this month, climbing from a more than three-year low in November.

HIGH DEPRECIATION

Olam's profit after tax and minority interest (PATMI) for the Oct-Dec quarter dropped 12.5 percent to S$134.9 million.

Revenue in the quarter fell 8 percent to S$4.5 billion, affected by lower volume and softer commodity prices.

Its edible nuts, spices and vegetable ingredients, wheat milling, sugar refining, as well as dairy and cocoa supply chain businesses performed strongly, while upstream dairy and wood products performance were disappointing.

Olam said its volume for the 2014 financial year would be quite subdued, as it curbs activity in less attractive markets and restructures its cotton, wood, dairy, sugar businesses and commodity financial services.

"In all those businesses, there are some trade flows and volumes that we are deliberately giving up, because we feel that the bang for buck in terms of invested capital and working capital in the business to generate that volume is not attractive and we have better options," said Verghese.

For the first half of the financial year, the company managed a 5.4 percent gain in earnings before interest, tax, depreciation and amortisation (EBITDA), a gauge of profitability excluding the effects of financing and accounting decisions. But a 31.8 percent jump in depreciation and amortisation charges pushed core profit down 8.5 percent.

The high depreciation and amortisation charges were caused by a S$1 billion expansion in invested fixed capital, about half of which was in food staples and packaged food segment on assets including grain mills, palm plantations and rice farms.

Olam came under attack from short-seller Muddy Waters in late 2012 for its accounting practices, only to be rescued by its top shareholder, Singapore's sovereign investor Temasek Holdings (Private) Ltd. A few months later, it set out to cut its capital spending and debt levels.

Net gearing at the six-month period stood at 2.06 times, creeping up from 1.93 times a quarter earlier, but lower than 2.21 times a year earlier.

The company posted a negative free cash flow of S$282.2 million, a deterioration from a positive free cash flow of S$46 million reported a quarter earlier, but said it remains on track to generate positive free cash flow for the financial year 2014.

Olam is among the top global suppliers of coffee and cotton, and a key player in the global player in the global cocoa market. It maintained its forecast of 185,000-tonne deficit for 2013/14 for the global cocoa market.