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

Olam

OCBC on 15 Feb 2012


Olam International Limited posted 1HFY12 revenue of S$7,716.4m, up 18.8%, meeting 40.8% of our FY12 estimate; core net profit fell 13.2% to around S$ S$132.8m, which still met 42.8% of our full-year forecast; this is also in line with the group’s historical seasonality where it typically achieves around 35-40% of its earnings in the first half. Going forward, management remains positive of its prospects in 2HFY12; and is also on track to achieve US$1b net profit by FY16. As its results were mostly in line with our forecast, we will leave our estimates intact for now. Our fair value also remains unchanged at S$2.63 (18x FY12F EPS). Maintain HOLD.

1HFY12 results mostly in line
Olam International Limited posted 1HFY12 revenue of S$7,716.4m, up 18.8%, meeting 40.8% of our FY12 estimate, aided by strong sales volume growth of 15.8% to 4.52m metric tonnes (MT). Reported net profit came in at S$162.7m, down 7.1%, meeting 45.7% of our full-year forecast; but if we strip out gains from biological asset and derivative instruments, we estimate that core net profit would have fallen 13.2% to around S$132.8m, which still met 42.8% of our core full-year forecast; this is also in line with the group’s historical seasonality where it typically achieves around 35-40% of its earnings in the first half.

Margins improve, driven by volume growth
Food Staples & Packaged Foods registered the largest sales volume growth of 20.2% in 1HFY12, followed by Edible Nuts, Spices & Beans (+14.3%), and Confectionery & Beverage Ingredients (+13.0%). And because of the strong volume growth of 17.7%, Net Contribution (NC) surged by 32.1% to S$541.2m, while NC/MT rose 12.2% to S$143.9/ton. However, the more recession-prone Industrial Raw Materials did not fare as well; while volumes grew by 7.4%, the NC/MT actually fell 29.3% to S$86/ton, still weighed by the Cotton sub-segment.

Improvements likely in 2HFY12
Nevertheless, management believes that the situation in the Cotton industry has somewhat normalized and expects the “perfect storm” to abate in 2HFY12. Meanwhile, management remains confident that it is on track to achieve US$1b net profit by FY16, using a “granular” strategy on where to compete. In total, Olam aims to execute about 65 initiatives and notes that it has already executed 17 of its 24 planned initiatives for FY12 and aims to execute another 33 in FY13 and finally six in FY14.

Maintain HOLD with S$2.63 fair value
As its results were mostly in line with our forecast, we will leave our estimates intact for now. Our fair value also remains unchanged at S$2.63 (18x FY12F EPS). Maintain HOLD. 

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.

Olam

Kim Eng on 31 Jan 2012

Olam International (OLAM SP) – Establishing a Russian foothold
Previous day closing price: $2.53
Recommendation –Hold (maintained)
Target price – $2.79 (maintained)

Partnership with RUSMOLCO for dairy and grains farming. Olam announced yesterday a 75:25 partnership with a Russian dairy company to develop large-scale dairy/grain farms in the Penza region of Russia. Olam will invest an initial amount of US$75m for a 75% equity stake in RUSMOLCO through a capital injection and purchase of shares from the current owners, who will retain a 25% stake.

US$75m upfront, first Russian upstream investment. Although Olam has been in Russia since 1993, this is its maiden upstream investment, envisaged to be a two-stage, long-term project reaching a steady state in 2019. According to management, Olam has been looking for an investment opportunity in the country for two years. This structure allows Olam to accelerate the development of an upstream presence in Russia by 3-4 years vis-à-vis a greenfield project, and saves it from undertaking the arduous task of aggregating land.

Favourable investment/financing terms. The debt portion of the investment will be project-financed. Although an additional US$320m in capex has been committed by RUSMOLCO for Phase 1 (to take place over the next 4-5 years), this is expected to be funded by the company’s internal cash flows, as well as support via the Russian government’s capital incentive programme. This means Olam’s risk and commitment is limited to the initial US$75m equity stake.

Why Russia? The country has strong growing domestic demand, but unlike in India and China, large parcels of land are available at comparatively lower cost. There is also more scope for improvements in yields through modern technology. In addition, the government is encouraging investments in the agriculture sector, for example through a zero agricultural tax. Olam has been chosen as a partner mainly due to its financial track record and strong supply chain network.

A very attractive investment on paper. The project is expected to be cashflow positive from the first year, and earnings positive from the second full year of operations, with steady state (2019) equity IRR of 28%. We keep our earnings estimates. We are positive on the investment but maintain our target price of $2.79 (pegged to 15x FY Jun12F) and Hold recommendation for now.

Olam

OCBC Research on 26 Jan 2012

Since the start of the year, Olam International Limited’s share price has staged a sharp recovery, rising 24% YTD to hit a recent high of S$2.64. It has also rebounded 28% from its 52-week low of S$2.06, likely driven by liquidity and also hopes of an impending monetary easing in China. But in view of the still uncertain economic outlook, we are not entirely convinced that the worst is behind us. Nevertheless, we recognise that demand for soft commodities, especially the essential food items, will continue to be well supported by population growth in China and the other developing countries. As such, we are bumping up our valuation peg from 14x (1 standard deviation below its 5-year mean) to 18x (0.5 SD below the mean) FY12F EPS, which in turn raises our fair value from S$2.05 to S$2.63. Given the limited upside, we maintain our HOLD rating.

Sharp recovery in share price

Since the start of the year, Olam International Limited’s share price has staged a sharp recovery, rising 24% YTD to hit a recent high of S$2.64. It has also rebounded 28% from its 52-week low of S$2.06, given that it was one of the underperformers last year. We believe that the recent outperformance was most likely driven by both liquidity and talks of an impending monetary easing in China, brought on by specter of weaker-than-expected growth prospects in the world’s second largest economy.

Global economy not out of the woods
And elsewhere in the world, the economic outlook is not much better. In fact, the IMF has just cut its forecast for global economic growth this year to 3.3% from 4.0% (made in Sep 2011), noting that the European debt crisis could threaten to derail the global economy. In its latest revision, the IMF now expects the euro zone to enter into a “mild recession” with growth likely to shrink by 0.5%. Even for China, the IMF now expects its economy to grow by 8.2%, down from an earlier 9.0% forecast. As such, the demand for commodities, especially industrial metals, could remain weak in the near term.

Maintain HOLD with higher S$2.63 fair value
In view of the still uncertain economic outlook, we are not entirely convinced that the worst is behind us. Nevertheless, we recognise that demand for soft commodities, especially the essential food items, will continue to be well supported by population growth in China and the other developing countries. As such, we are bumping up our valuation peg from 14x (1 standard deviation below its 5-year mean) to 18x (0.5 SD below the mean) FY12F EPS, which in turn raises our fair value from S$2.05 to S$2.63. Given the limited upside, we maintain our HOLD rating. 

Olam

DMG & Partners Research on 17 Jan 2012


DMG & Partners Research in a Jan 17 research report says: "Olam has a net profit target of US$1 billion by FY2016. The bulk of the target will be achieved via organic SCM business growth (forecast 15-17% pa volume growth) and already-announced projects.


"In addition, management will work on upstream initiatives eg on plantations and fertilizer business as well as selective mid-stream projects to drive its earnings. Management does not foresee any further equity fund raising to enable it to meet the US$1 billion target. Instead, management will look to borrowings, given management’s comfort zone of 2-3x leverage, versus Sep 11’s 1.7x.


"We also like Olam’s sound track record - 33% CAGR net contribution over past 3 years. Target price of $2.98. Olam’s FY12 PE of 12.7x is also lower than historical average of 18x. MAINTAIN BUY."