Olam

Kim Eng on 15 Feb 2012

Olam International (OLAM SP) – Slower amid difficult conditions
Previous day closing price: $2.61
Recommendation –Hold (maintained)
Target price – $2.85 (maintained)

Slightly below expectations. As widely known, 1HFY Jun12 coincided with a period of difficult macro trading conditions, weak fundamental demand as well as crop disruptions, which have seen many trading companies post dismal results. While Olam’s results were slightly below expectations, they were relatively robust.

Profit growth. Excluding one-off items, net profit grew by 15% YoY for both the quarter as well as 1HFY Jun12 to $162.7m. If further adjusted for biological fair value gains, net profit was $128.7m (up 12.5% YoY). However, it should be noted that Olam has been on an aggressive acquisition trail; adjusting for the increased number of shares in this period, average EPS showed a slight 1% decline. Sales volume showed a 16% YoY increase.

Dragged down by industrial raw materials. Performance was dragged down by the industrial raw materials segment (net contribution down 24% YoY), which was more recession sensitive. All other segments, however, showed double-digit growth in net contribution. Cotton, in particular, continued to be an issue, a situation also faced by its peers like Glencore and Noble. Management expects that default issues here have bottomed out and counterparty risk subsided by this quarter, given the recent price stability.

Citing diversity. Management cited Olam’s diversification as a key factor for its outperformance against peers. This is in terms of the number of commodity products as well as the different ways in which the company participates in the whole supply value chain. Olam currently operates in about 20 commodity products and across 65 countries. Risk management was another factor cited, especially with regard to cotton.

Maintain Hold. Management believes that the 2016 $1b net profit target is on track, but also expressed caution when giving guidance for 2012 earnings, citing this as an uncertain year. We trim our earnings estimates by about 5-9% and maintain our Hold recommendation. Our target price of $2.85 is pegged at 15x FY Jun12F/13F blended earnings. Key risks include execution on the aggressive M&A front.