Monday 29 April 2013

Olam International

OCBC on 26 Apr 2013

Olam International Limited (Olam) has completed its strategic review and intends to take a rebalanced approach to growth and cashflow generation. To achieve its goals, Olam has identified six specific pathways or “concrete actions”. By doing so, management believes that Olam can become FCF positive by FY14 and also reduce its gearing boundary condition from <2.5x to <2.0x. However, we suspect that any meaningful impact may take some time to flow through (likely towards end FY16). As 3Q13 results are due in two weeks, we opt to leave our forecasts unchanged for now. Meanwhile, we keep our HOLD rating but place our S$1.50 fair value under review.

Accelerate free cash flow generation
Olam International Limited (Olam) has completed its strategic review and intends to take a rebalanced approach to growth and cashflow generation. Olam believes that the successful execution will considerably strengthen the group and result in continued growth in profits, a stronger balance sheet, improved operating performance, sustained positive FCFs and promote a better understanding of Olam’s business by its key stakeholders.

Targets FCF positive by FY14
To achieve its goals, Olam has identified six specific pathways – 1) recalibrate pace of investments (reduce pace of capex by S$1b); 2) optimize balance sheet (release ~S$500m of cash); 3) pursue opportunities for unlocking intrinsic value (release ~S$1b of cash); 4) reshape portfolio and reduce complexity (optimize portfolio and rationalize profit centres not meeting productivity norms); 5) improve operating efficiencies (release ~S$80-100m of annual savings); and 6) enhance stakeholder communication (give additional performance data). As such, Olam expects to be FCF positive by FY14 and also reduce its gearing boundary condition from <2.5x to <2.0x.

Meaningful impact may take time
While the review has identified “concrete actions”, we believe that any meaningful impact may still take some time to realize. And in the meantime, the re-jigging of its business units is likely to have some impact on earnings, although management believes that it should still see earnings growth in the next four quarters. Olam also notes that the release of cash is likely to be progressive and be recognized by the end FY16. Olam adds that it will not give specific point or range guidance on profitability for FY16; previously it had a target to grow NPAT to S$1b by then (including fair value gains).

No change to estimates for now
As 3Q13 results are due in two weeks, we opt to leave our forecasts unchanged for now. Meanwhile, we keep our HOLD rating but place our S$1.50 fair value under review.

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