Olam

CIMB on 15 Feb 2012

OLAM International's core EPS for H1 FY2012 (six months to Dec 31, 2011) met expectations, at 30 per cent of our FY2012 forecast and 34 per cent of the consensus forecast. H1 typically accounts for 30-40 per cent of full-year earnings due to seasonality. We keep our 'outperform' rating, EPS forecast and target price of $3.17 (at a PE of 15x based on calendar year 2013 forecast earnings).

The Q2 FY2012 results reaffirm our long-standing belief that Olam's earnings are more resilient than its peers', thanks to its recession-proof portfolio which comprises 81 per cent edibles. Revenue grew 11 per cent y-o-y, with broad-based growth.

A 15 per cent increase in volume offset lower commodity prices. Edibles volume rose 18 per cent; the increase for industrial raw materials was a smaller 7 per cent.

Net contribution (NC) per tonne was steady as better profitability for edibles compensated for lower margins at industrial raw materials, which management blamed on sluggish demand for cotton and wood. Excluding non-core gains, core net profit grew 12 per cent y-o-y, which is respectable in the light of challenging market conditions.

We believe H2 will be stronger, buoyed by normalising commodity markets and seasonal strength. Earnings visibility and margins should stabilise with most commodities reverting to contango.

While industrial raw materials may remain sluggish, management does not foresee impairment risks as inventories have been hedged, with some over-the-counter hedges stretching up to two years.

The return of market risk appetite has lifted cyclical stocks like Olam. We see room for further re-rating.
Despite its 22 per cent appreciation YTD, it is still trading at 1.2 standard deviations below its seven-year mean.

Olam remains confident of attaining its US$1 billion profit target by FY2016. M&A initiatives are expected to propel its earnings trajectory and to lift its profit margins if executed according to plan.
OUTPERFORM