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July 21, 2020

Olam International: Cocoa Against COVID

BY Warut Promboon

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( 27 mins)
Asset Class Credit
Quality High yield
Geography Singapore
Sector Agricultural
Credit rating NR
Report date 4-June-2020

Executive Summary

 We initiate our coverage of Olam International Limited (Olam), a leading global food and agri-business with >30 years of track record, headquartered in Singapore and majority-owned by the Singapore quasi-sovereign Temasek Holdings. The group laid out its 6-year strategic plan in 2019 to streamline its operations to be more focused on growth food segments, in line with healthy living and staples that are recession-proof so as to achieve its target to be the most differentiated and valuable global food and agri-business by 2024. This has resulted in divestments of non-prioritized businesses and assets since 2019 and more will be seen this year.

 Olam’s core business has been relatively low-margin and often exposed to the volatilities inherent in the agricultural and commodity sectors. As such, management looks to shift to a more value-added ingredient business and to add significant investments in mid-stream and processing activities so as to have greater pricing power and greater customer loyalty. As such, we expect the Group to remain highly leveraged on its capex stemming from expansion plans. Nevertheless, net gearing fell to a more comfortable 0.3x last December, after adjusting for realisable marketable inventories, secured receivables, and cash. We believe the two new separate entities will go for separate listings (IPOs) to bring in fresh equity funds when market conditions improve. We expect free cashflows to remain positive this year and next, due to full-year contributions from new investments in 2019, and proceeds from its ongoing divestments. 

Based on YTMs at time of writing, we believe the maturing OLAMPSP 20s are fairly-valued and assign a NEUTRAL recommendation. The rest of OLAMSP USD complex (EXHIBIT 1) is attractive against the “B+” benchmark and we assign an OVERWEIGHT recommendation which is based on (1) Olam’s potential revenue growth from its cocoa, grain, and animal feeds, and (2) potential IPOs of the Group’s two key businesses which would de-lever the Group’s balance sheets. On the other hand, the OLAMSP SGD complex is unattractive versus its USD counterparts and we assign an UNDERWEIGHT recommendation. 

Bond Valuation

Olam has seven outstanding bond issues (EXHIBIT 1), two in SGD and the remaining in USD. 

Olam International: Cocoa Against COVID 18

We believe the OLAMSP USD complex traded in an upward sloping curve which prices OLAMSP 5.35% 49s to the call date (20-Jul-21).  OLAMSP 10/22s (in SGD) appear unattractive, in our view, against OLAMSP 9/22s (in USD).  We also prefer OLAMSP 5.35% 31-Dec-49s (in USD) over OLAMSP 5.5% 31-Dec-49s (in SGD), callable in July 2021 and 2022, respectively, as the former has a higher YTWs of  7.7% at the time of report, similar to OLAMSP 23s, even though its call date is next July. We expect OLAMSP USD perpetuals to be called for the following reasons:

  • The reset coupon will rise to 6.6%, higher than the SGD denominated perpetual reset coupon and above its current coupon rate, based on current 5-year US Treasury rate of 0.34% which is trading at its lows.
  • Olam should have either sufficient liquidity to redeem or creditworthiness to refinance the perpetuals on the call dates.
  • Global rates to remain low on slow economic recovery through 2021 and the step-up margin is sufficient to convince Olam to refinance (rather than not calling) the perpetuals

We believe the market has priced OLAMSP as a “B+”-rated credit (EXHIBIT 2) though we believe the Group’s credit profile can be up to “BB-“. We see Olam’s global industry peers such as Archer Daniels Midland Company (“A”-rated) (ADM), Barry Callebaut AG (“BBB”-rated) (a Cocoa and premier Chocolate producer), and Louis Dreyfus Company (Not rated) (LDC).  

LDC which produces cereals, coffee, juices, edible oils, pulses, rice, sugar, fibre and plant-based products used in pharmaceutical and cosmetic products is a closer global comparison with Olam in terms of size and produce, except that the latter has divested its sugar business and does not produce cereals, juices nor products for the pharmaceutical and cosmetics industry. LDC’s LOUDRE 5.25%13-Jun-23s traded at YTM of 7.2% (EXHIBIT 3) which we see as fairly-valued for LDC. Compared to LDC, Olam stands out in terms of its higher profitability ratios and better debt servicing ratios.  LDC is majority-owned by the Dreyfus family while Olam is majority-owned by Temasek Holdings, the Singapore government’s investment arm which took a controlling stake in Olam to help fend off attacks from a US short-seller Muddy Waters in 2014 (EXHIBIT 4). Although Olam’s stronger parentage should give it a higher rating, but in view of the fact that there may be possible shareholding changes after the IPOs, a B+ rating would be fair for Olam, in our view.The closest Asian peer in our view is Wilmar International (Wilmar) (Not rated)’s USD 17-April-2021s with a YTM of 3.4% (EXHIBIT 2). We see Wilmar’s USD bonds as a “BB+” credit and consider the bonds fairly-valued. 

EXHIBIT 2 shows most of OLAMSP USD bonds trading above the B+ food & beverage benchmark. OLAMSP 20s trading on the B+ benchmark at the time of this report, will mature in 2 months. We see the 20s as fairly-valued and we assign a NEUTRAL recommendation. We see the rest of the USD bonds as attractive versus the B+ food & beverage benchmark and assign an OVERWEIGHT recommendation. We prefer Olam’s USD bonds to its SGD bonds on the USD bonds’ higher YTMs and better liquidity. Hence, we UNDERWEIGHT the OLAMSP SGD complex as we see the SGD complex as overvalued against its USD peers.

Olam International: Cocoa Against COVID 19
EXHIBIT 2: OLAMSP Complex vs food & beverage benchmarks and vs. Wilmar’s USD bonds
Olam International: Cocoa Against COVID 20
EXHIBIT 3: OLAMSP Complex vs. LOUDRE 23s
Olam International: Cocoa Against COVID 21
EXHIBIT 3: OLAMSP Complex vs. LOUDRE 23s


More focused portfolio 

Management reorganized Olam this January after its divestments of deprioritised businesses (sugar, rubber, fertiliser and wood products) into two new coherent groups: (i) Olam Food Ingredients and (ii) Olam Global Agri (see Background) to capitalize on the key trends in consumer consumptions which is a growing trend of healthier 

foods; sustainable sourcing, e-commerce, and the rise of “purpose” brand – consumers going for “right-for-me’, “right-for-the-planet”, and “right -for-producers” products. 

The divestments have raised SGD488m in 2019, well ahead of its planned divestment target. The distinct re-organisation with separate CEOs for the two distinct businesses which will also pave the way for a possible listing of the two separate businesses so as to maximise the value of Olam’s businesses in the next 18-24 months.

Olam’s portfolio of specialty agri-products and food ingredients are not in direct competition with major peers such as Archer Daniels Midland (ADM) and Bunge. Olam has developed global leadership positions in these food segments that meet today’s consumer preferences for healthy living. In the mainstream bulk commodities such as rice and cotton, its focus on destination processing, such as wheat milling in Africa, has led to its strong leadership position. Their selective integration in the value chain across more than 60 countries and unique Africa footprint is what makes Olam stand out against competitors, in our judgment.

Recession-proof business

80%-85% of Olam’s revenue is in a food category where demand is less sensitive to economic downcycles. There was a spike in consumption of edible oils and coffee as more people cooked and stayed at home rather than dining out during the COVID-19 lockdowns in 1Q20. However, there was also lower demand for non-food products like cotton, almonds, and dairy (the latter two affected by China lockdown during COVID-19). In general, demand for most food staples was resilient. Olam has seen a spike in demand for some food staples due to the pantry restocking effect at the retail and household level during the COVID-19 pandemic as countries worldwide went into two to three months’ of lockdown where households were allowed out of their houses only to buy groceries and necessities. Olam’s manufacturing facilities remained smoothly running throughout COVID-19 lockdowns in the majority of its markets as these were deemed as essential food services.

There was no major counterparty credit risk and Olam was able to re-route the titles to stocks from buyers (which defaulted in edible oils and cotton when prices of these fell sharply, partly due to COVID-19) to other buyers. Olam’s counterparty credit risk is partly covered by insurance and the balance were put forth to international arbitration for contract resolution.  There was also insurance coverage for damages on goods in marine transit due to delays in ports caused by lockdowns or damages to inventories due to limited access to warehouses and office premises during the current lockdowns. Olam has so far not claimed on inventories nor properties but the company has claimed for its employee medical expenses under medical insurance.


Commodity price volatility

Olam primarily buys and sells exchange-traded futures and options to manage market exposure to adverse commodity price movements. The Group established policies and exposure limits that restrict the amount of unhedged fixed price physical positions in each commodity. We do not compare Olam to Noble Group which was hard hit by its derivative trading practice from time-to–time, but we believe derivative trading is a two-edged sword. Using derivatives wisely with a proper policy can help with commodity price volatility while derivatives without good risk management can backfire.

For cotton, onions, tomatoes, and other vegetables, Olam only provides seeds to farmers to sow and grow and does not take the harvest risks and farming costs which are all borne by the farmers. Olam however has the first right to buy the produce from these farmers when these annual crops are harvested. In 2019, the Jasmine rice farmers were hit by both flooding and drought during the same season. This will result in a shortage of good quality rice seeds for 2020. We understand Olam’s management is working with the Thai Rice department to ensure that its farmers have sufficient good quality seeds in order to maintain the best quality and yield.

Rising capex and debt overhang over next few years

Olam invested SGD1.1bn in 2019, of which 81% was capex used to acquire 3 businesses: (i) a leading cocoa processor in Indonesia (January 2019) to capitalize on Asia’s growing demand for cocoa powder; (ii) Hughson Nut Inc in California (October 2019) which will offer Olam a fully integrated solution across the almond chain, and (iii) Dangote Flour Mills in Nigeria (November 2019) which will double its wheat milling and pasta manufacturing capacity which will enable Olam to become the market leader in one of the fastest growing markets in Africa. 

Management plans to spend USD3.5bn (growth and maintenance capex) in the 6-year strategic plan, of which  USD1.6bn was funded through divestment. That will leave a shortfall of about USD2bn which we believe will be funded by a combination of debt and equity; the latter possibly through IPOs of its two new operating divisions.

FY19 results delivered a marginal positive free cashflow, above management’s expectation as they had earlier expected it to be in negative territory. Moreover, Olam has consistently delivered >SGD1bn of EBITDA for the past five years (EXHIBIT 19), and the company has utilised only 2/3s of the USD5bn Euro Medium Term Notes. That said, a potential debt overhang is always there for Olam.

Financial Updates

Olam’s EBITDA rose 26% in 2019 on higher contributions from all segments, except for the Industrial raw materials, infrastructure and logistics (EXHIBIT 5). The bulk of the increase came from cocoa, grains, and animal feed & protein businesses. Its 1Q’20 EBITDA declined 7.0% to SGD390.9m on lower contributions from edible nuts, spices, coffee, dairy, and edible oils (affected by China lockdown caused by COVID-19), partly compensated by price increases in cocoa, grains, animal feed & protein, and cotton during the quarter. 

According to a 20-April report by Feed, the COVID-19 pandemic has caused huge increases in global demand for animal feed as there were concerns that feed mills would be shut down, or animal feed deliveries would be affected because of truck shortages. We believe a decline of EBITDA in 1Q’20 is temporary and expect Olam’s bottom line to be boosted by resilient demand in cocoa, grain, and animal feed this year.

Olam International: Cocoa Against COVID 22

The EBITDA margin has been quite stable at around 6-7% (EXHIBIT 8), with the exception of 2018 where its EBITDA margin slipped to 5% due to the protracted US-China trade tensions, depressed commodity prices, and rising interest rates.  The 2019 margin improvement reflects a divestment of its non-prioritized businesses such as sugar, garlic, and onion farming. 

Olam’s balance sheet was strengthened during the quarter. A total of SGD20.5bn, comprising cash equivalents of SGD4.5bn, readily marketable inventories (RMI) of SGD6.3bn, secured accounts receivable of SGD2.2bn, and unutilised bank lines of SGD7.5bn, was available to meet Olam’s working capital and capex requirements in March. Gearing rose marginally to 1.53x (1.38x) in 1Q20 but the ratio fell to 0.35x (0.34x) if we adjust for RMI and secured receivables. Its liquidity position has also improved with a shorter cash conversion cycle, from 147 days in 2016 to 70 in 2019 (EXHIBIT 8). Its cash-on-hand can cover half its short-term debt for the past two years. Its high debt service ability is also supported by Its high interest coverage ratio of 3x by its EBITDA compared to less than 2x for LDC (EXHIBIT 11). 

Olam’s Gearing is not as high as it seems if we adjust for the readily marketable securities and secured receivables as shown in table below (EXHIBIT 6). Net gearing of Olam increased from 1.32x to 1.38x in 2019 due to the adoption of SRFS(1)16, without which the ratio would have remain unchanged compared to 2018.  Adjusting for readily marketable inventories and secured receivables, adjusted net gearing for Olam would have fallen to 0.29x, unchanged from last year. Olam had a USD5bn Euro medium term note and it recently secured a USD176m term loan with International Finance Corporation (IFC) and Japan International Corporation Agency, comprising a 5-year term loan of USD120m, and a 7-year term loan of USD56m (See a list of the outstanding long-term debt in EXHIBIT 9 & 10).

Olam International: Cocoa Against COVID 23
EXHIBIT 6: Olam’s Debt Picture
Olam International: Cocoa Against COVID 24
EXHIBIT 7: Financial Results 
Olam International: Cocoa Against COVID 25
EXHIBIT 8: Financial Ratios
Olam International: Cocoa Against COVID 26
EXHIBIT 9: Medium Term Notes 
Olam International: Cocoa Against COVID 27
EXHIBIT 10: Total Borrowings 
Olam International: Cocoa Against COVID 28
EXHIBIT 11: Peer Ratio Comparison

The closest competitor in terms of size and products, in our view, is LDC which is a leading merchant and processor of agricultural goods, ranging from oilseeds, grains to coffee, cotton, rice, sugar, juice, and dairy. In 2019, LDC’s sales were USD34bn (versus Olam’s USD24bn) but reported a 21% decline in EBITDA to USD 836m (due to uncertainty caused by the US-China trade tensions and the African swine flu) versus a 37% improvement to USD1.5bn for Olam. LDC’s net debt/equity of 3.1x is twice that of Olam (EXHIBIT 10). Both have reasonably good liquidity ratios but leverage is also on the high side, at above 60% for both due to their acquisition plans. However, Olam stands out in terms of higher profitability margins and better debt servicing ratios where its debt-to-EBITDA is less than half of LDC, whilst its interest coverage is above 3x versus only 2x for LDC.

Wilmar International Limited (Wilmar), Asia’s leading agri-business group and 25% owned by ADM, is about twice the size of Olam in terms of revenue and EBITDA. Wilmar is also involved in palm oil cultivation, edible oils refining, flour milling, manufacture of consumer products, biodiesel and fertilisers, and sugar milling which Olam divested last year.  Although Olam is comparable to Wilmar in terms of its profitability, liquidity and interest coverage ratios, Wilmar has a better credit profile due to its lower leverage ratio (57% vs Olam’s 66%) and higher free cashflow of USD2bn vs Olam’s SGD135m in 2019.      


Olam International is a leading food and agri-business supplying food, ingredients, feed and fibre to 25,200 customers worldwide. No single customer accounts for more than 10% of its turnover. Top 25 customers accounted for only 23% of its annual sales (EXHIBIT 12). Olam’s value chain spans over 60 countries and includes farming, processing, and distribution operations, as well as a sourcing network of an estimated 5m farmers. It is worth noting that one in eight chocolate bars eaten globally is made from beans handled by Olam, the company makes enough cotton to provide the world’s population with three pairs of socks each year, and the quantity of rice it handles annually could feed all of Africa for a week. In its 6-year strategic plan initiated in 2019, Olam will divest four businesses, namely sugar, wood, rubber products, and fertilisers over the plan period for ~SGD1.6bn.

E-commerce was introduced in 2019 in specialty coffee, spices, and edible nuts for Olam to reach out to small & medium sized businesses which Olam could not reach in the past. The digital platform added 460 new e-commerce customers and generated SGD30m of incremental sales at higher margins for the group in 2019.

12 growth prioritised businesses were streamlined into 2 key operating groups:

  • Olam Food Ingredients (OFI) offers sustainable, natural, value-added food products and ingredients such as cocoa, coffee, edible nuts (cashew, peanuts, almonds, hazelnuts, pistachios, walnuts, sesame and beans including pulses, lentils and peas), spice,s and dairy. Olam has built a global value chain presence including its own farms, farm-gate origination, and manufacturing facilities. 
  • Olam Global Agri (OGA) is a leading player in high-growth Asian and African countries supplying food (such as edible oils, rice), animal feed, and fibre (cotton) and commodity financial services. OGA has dairy cattle in Uruguay and Russia. At the end of FY19, the Group held ~42,000 (2018: 45,000) cows, which are able to produce milk (mature assets) and ~45,000 (2018: 42,000) heifers and calves, being raised to produce milk in the future (immature assets). The cows produced 275m litres of milk in  2019 vs. 291m litres in 2018 with a fair value of SGD166m in 2019 vs. SGD170m in 2018, net of point-of-sale cost.
Olam International: Cocoa Against COVID 29

Food staples & packaging food accounts for 53% of Olam’s total sales revenue in 2019, followed by confectionery & beverage ingredients (20%), edible nuts & spices (13%), and industrial raw materials, logistics & infrastructure (13%). In terms of geography, Asia, Middle East, and Australia account for nearly half of Olam’s total revenue, followed by Europe (20%), America (17%), and Africa (14%). 

Annual crops consist of various commodities such as cotton, onions, tomatoes and other vegetables, rice, and grains. For cotton, onions, tomatoes and other vegetables, the Group provides seeds to farmers to sow and grow while for rice and grains, the Group manages its own farms. For annual crops where seeds are provided, the farmers take all the harvest risks and bear all the farming costs. 

However, Olam has the first right to buy the produce from these farmers, when these annual crops are harvested. At the end of FY19, Olam’s total planted area of annual crops is 115,794 hectares, excluding for those commodities where farms are not managed by the Group. Olam harvested 50,662 metric tons of almonds in 2019, which had a fair value less estimated point-of-sale costs of ~SGD428m. 

Livestock relates mainly to dairy cattle in Uruguay and Russia. At the end of FY19, Olam held ~ 42,000 cows, which are able to produce milk (mature assets) and ~45,000 heifers and calves, being raised to produce milk in the future (immature assets). The cows produced about 275 million litres of milk with a fair value less estimated point-of-sale costs of SGD166m during the financial year. Poultry relates mainly to breeding chickens for meat and laying eggs in Nigeria. At the end of the financial year, the Group held ~1.7m chickens.

Recent events

On 24 December 2019, the Group announced that Gabon Special Economic Zone (“GSEZ”), an associate of the Group, is reorganising its infrastructure and logistics business into three verticals – ARISE Port & Logistics (“ARISE P&L”), ARISE Industrial Zones (“ARISE IZ”), and ARISE Infrastructure Services (“ARISE IS”). On 28 January 2020, as part of this reorganisation, the Group entered into an agreement with A.P. Moeller Capital (“APMC”) and Africa Finance Corporation (“AFC”) who will inject additional capital into ARISE P&L, resulting in APMC holding a 43.0% stake, with Olam and AFC holding the residual 31.0% and 26.0% stake respectively. (b) On 3 March 2020, the Group announced the sale of its remaining 50.0% equity stake in Indonesian sugar joint-venture Far East Agri to its joint venture partner Thailand’s Mitr Phol Sugar Corporation for a total consideration ~ between USD112.5m and USD115.9m, subject to final adjustments as provided in the sale and purchase agreement.

Industry Outlook

Data Bridge predicts that global cocoa trade volume will post steady mid-single digit CAGR growth over 2019-2024. EXHIBIT 13 shows rising cocoa prices which reflects growing cocoa demand on its rich antioxidant source which helps reduce high blood pressure and improve coronary fatigue syndrome, and also offers safety against sunburn where cocoa butter is a key ingredient in body lotions and creams. Its new-found application in cosmetic and pharmaceutical products will also help drive demand.

70% of the world’s cocoa beans come from four countries in Western Africa (i.e. Ivory Coast, Ghana, Nigeria, and Cameroon) with the former two by far the largest producers of cocoa, contributing more than half of the world’s cocoa.  Olam has presence in all the four countries. Olam is among the top 3 cocoa processors in the world, with 12 facilities and among the top three leading suppliers of green coffee by market share in terms of global trade.

Olam International: Cocoa Against COVID 30
EXHIBIT 13: Cocoa Price

Data Bridge expected the global espresso coffee market to grow at CAGR of 8% p.a. from 2019 to 2024. We believe that rising purchasing power of the millennials and the growing trend of drinking coffee from outside the home will continue to boost coffee consumption.  We also believe the demand for coffee is inelastic and do not expect coffee drinkers to stop drinking on rising coffee prices (due to supply shortages). EXHIBIT 14 shows a resilient coffee price since 1990. Olam sources its coffee from a large network of farmers across 20 countries in Asia, Africa, and Central and Latin America. The Group has also invested in its own estates in Brazil, Laos, Tanzania, and Zambia, diversifying its production sources across the world so that its supply will not be at the mercy of bad weather in any country.

Olam International: Cocoa Against COVID 31
EXHIBIT 14: Coffee Price

Global demand for nuts, especially healthy ones such as almonds and walnuts, will remain strong with the rising consumption trend towards healthy snacks and higher standards of living, in our view. The increasing preference for vegan and gluten-free diets will also help bolster demand for such healthy nuts which is forecast to grow at more than 10% p.a., according to Data Bridge. Olam’s JV with Guzman Global of Spain in 2018 spearheads the group’s coffee and edible nuts market in the Spanish and Portuguese markets. A leading supplier of edible nuts with the broadest nuts and superfood portfolios ranging from almonds, cashew, pistachios, hazelnuts, peanuts, walnuts, macadamias, sesame to quinoa, and chia, Olam is the only global integrated player with farming, procurement, processing and distribution capabilities.

Edible oil prices have been quite stable for the past five years, averaging around USD683, USD800, USD855 and USD803 per ton for palm, sunflower, rapeseed, and soybean oil respectively (EXHIBIT 15). These are the four major oils in Olam’s edible oils portfolio, with palm products having the largest share and accounting for a sizeable market share in Africa and Asia. Olam does not see C16Biosciences, funded by Bill Gates, which converts food waste and industrial by-products into synthetic palm oil as a major threat because palm oil is not easy to replace as it is produced on a large scale of 75m tons annually. According to research, the only viable large scale direct substitute of palm oil are microbial single cell oils from algae or yeast, but this requires significant further development before they can be commercially viable.

Olam International: Cocoa Against COVID 32
EXHIBIT 15: Edible Oil Price

Rice is a staple food for more than half of the world. With rising world population, we expect demand for rice to rise in tandem (EXHIBIT 16). Since its operations in 2016, Olam has expanded into every rice exporting country outside of the US. Olam is a leading originator, distributor, and merchant of rice globally and is amongst the top three suppliers by market share by global trade.  The Group owns a 10,000 hectare rice farm in Nigeria where it supplies to the Nigerian domestic market.

Olam International: Cocoa Against COVID 33
EXHIBIT 16: Rice Price

Olam is one of the top two cotton merchants in the world by market share, supplying all the cotton growths to the world’s textile industry. Olam has a global sourcing network of growers, ginners, and suppliers across all 4 major continents of Africa, Asia, America, and Australia. The company has also the largest private ginner worldwide. EXHIBIT 17 shows a flat price trajectory for cotton of which we do not see any major upside in the near term.

Olam International: Cocoa Against COVID 34
EXHIBIT 17: Cotton Price

*We would like to thank Ms. Look Peck Liang for her contribution in this report*



Analyst Certification: 

The analyst named in this report certifies that all views expressed in this report accurately reflect the personal views of the analyst with regard to any and all of the subject securities and companies mentioned in this report and no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by that analyst herein. 


The analyst named in this report does not have any financial interest in the corporations(s) mentioned in this report. Additional information will be made available upon request.


Research originating in Hong Kong is issued by MLB Asset Management Limited (“MLB”). MLB, a limited company registered in Hong Kong, is regulated by the Hong Kong Securities and Futures Commission (SFC). The registered office is at Unit 9, 12/F Wing On Plaza, 62 Mody Road, Tsim Sha Tsui East, Kowloon, Hong Kong. All of the opinions contained in this report constitute the views of the analyst named in this report as of the date this report is issued. The opinions are hence subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. In relation to producing research, MLB relies on factual information provided by related entities, regulators, and/or other market information providers. 

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