Olam International

DMG & Partners Research on 29 Aug 2012

OLAM reported Q4 FY2012 net profit of S$110 million, down 14 per cent y-o-y.

If we strip out the effects from biological gains exceeding our forecast, adjusted net profit would be S$71 million, below our S$91 million forecast. This weakness is due to higher expenses.

There was y-o-y earnings weakness from the industrial raw materials space, but food continues to power ahead.

We lowered our FY2013 net profit forecast by 6 per cent to factor in continued cotton and wood weakness and higher costs.

We remain positive on food, which accounted for 87 per cent share of net contribution (NC). Olam trades at a FY2013 forward PE of 10.8 times, which is inexpensive versus FY2013 forward net profit growth of 21 per cent.

Maintain "buy" with an unchanged target price (TP) of S$2.56, derived from a three-stage discounted-cash-flow valuation model. Our TP translates into a FY2013 PE of 13.9 times, which is lower than the historical average of 17 times.

The three food segments collectively recorded FY2012 NC growth of 32 per cent.

In contrast, the industrial raw materials suffered a 41 per cent plunge in NC, with cotton origination affected by extreme market volatility, demand illiquidity and declining volumes.

As the food segments account for 87 per cent share of NC, overall NC still recorded a respectable 13 per cent growth.

Olam has made cumulative capital expenditure of S$4.4 billion thus far, and has already committed another S$1.7 billion, the bulk of which will be utilised in FY2013 and FY2014.

Olam plans to achieve its FY2016 target US$1 billion profit after tax without raising fresh equity.

Olam will use the debt capital market to source for funding for its investments. Olam's lower gearing also provides scope for more debt to drive its acquisitions.
BUY