Olam’s earnings volatility to spike on back of massive acquisition spree

ADM’s cocoa processing margins are highly lumpy.

Olam’s recent acquisition spree could dent its earnings in the near-term. The agribusiness giant yesterday revealed that it is acquiring the global cocoa processing business of Archer Daniels Midland for $1.7b (US$1.3b), barely two week after it acquired peanut sheller McCleskey Mills for $231m.

According to Maybank Kim Eng, ADM’s cocoa processing margins have been highly lumpy in recent years due to industry overcapacity, which will cause Olam’s earnings to become more volatile.

The deal will also cause Olam’s gearing to rise from 1.85x ro 2.14x upon completion. Maybank Kim Eng also notes that Olam lacks near-term catalysts.