Olam Group's Strategic Reorganization and Sustainability-Driven Growth: A Path to Recovery and Future Investment Potential

Olam Group (SGX: VC2), a global agri-food and ingredients company, has navigated a complex five-year journey marked by financial volatility, strategic reorganization, and a renewed focus on sustainability. While its performance from 2020 to 2024 revealed challenges such as declining profitability and elevated debt, recent strategic shifts and sustainability initiatives position the company for a potential turnaround. This analysis evaluates Olam's underperformance, its reorganization efforts, and the role of sustainability in unlocking long-term value.

Five-Year Underperformance: Profitability Pressures and Structural Challenges

Olam Group's financial performance from 2020 to 2024 was characterized by strong revenue growth but significant profitability headwinds. In FY 2024, the company reported a 16.3% year-on-year revenue increase to US$56.2 billion, driven by improved performance in Asia, the Middle East, and Australia. However, pre-tax profit before exceptional items (PBT) and post-tax profit before exceptional items (PAT) plummeted by -50.98% and -63.43%, respectively, due to rising net finance costs and losses from the Remaining Olam Group. The group's gearing ratio surged to 2.79 times as of December 31, 2024, reflecting higher debt exposure from working capital needs and volatile commodity prices.

These challenges were exacerbated by operational restructuring, including the temporary shutdown of non-strategic food operations and asset divestments, which temporarily impacted operating performance. Despite these setbacks, the company's resilience in key segments like Olam Food Ingredients (OFI) and Olam Agri-driven by double-digit EBIT growth-highlighted pockets of strength.

Strategic Reorganization: Unlocking Value Through Divestments and Focus

Olam's strategic reorganization over the past five years has centered on divesting non-core assets and refocusing on high-growth businesses. A pivotal move was the sale of 44.58% of Olam Agri to Saudi Agricultural and Livestock Investment Company (SALIC) for US$1.78 billion, signaling a shift toward unlocking shareholder value. Similarly, the group sold its remaining 32.4% stake in ARISE P&L for US$175 million, with proceeds earmarked for special dividends.

The company has also secured substantial loan facilities-US$2.45 billion for OFI and US$3.85 billion for Olam Agri-to support refinancing and capital allocation. These steps reflect a broader strategy to streamline operations, reduce debt, and prioritize businesses with higher margins. By restructuring its portfolio into three operating groups-OFI, Olam Agri, and the Remaining Olam Group-Olam aims to enhance operational clarity and investor focus.

Sustainability as a Growth Lever: Aligning ESG with Long-Term Value

While direct financial metrics for sustainability initiatives remain opaque, Olam's commitment to ESG (Environmental, Social, and Governance) principles is increasingly central to its value proposition. The company has pledged to improve the livelihoods of 700,000 farming households by 2030 through tools like the living income calculator and sustainable sourcing programs. Additionally, it is preparing for compliance with the EU Deforestation Regulation ahead of its 2025 enforcement, demonstrating proactive risk management.

These initiatives are not merely ethical commitments but strategic enablers. By aligning with global ESG standards, Olam enhances its appeal to impact investors and mitigates regulatory risks. For instance, its climate resilience programs and water usage reduction targets position it to navigate supply chain disruptions linked to climate change. While the 2024 Annual Report does not quantify revenue contributions from sustainability efforts, the integration of these practices into core operations-such as OFI's higher-margin Ingredients & Solutions segment-suggests indirect benefits in brand equity and operational efficiency.

Future Investment Potential: Balancing Risks and Opportunities