Nomura
We reiterate our preference for Noble and Olam as we believe the fundamentals are intact and these companies will come out of any crisis even stronger. Plus, both Noble and Olam are much changed (and better) business models now as compared to four years back – both have expanded across the value chain, have higher long term capital and exposure to upstream/processing assets now.
Olam – Earnings rose in FY09 as well, balance sheet is much stronger now
For Olam, the earnings momentum should continue to be strong helped by assets like Crown Flour Mills, almonds plantations etc. Also, note that Olam has invested ~S$800mn in equity for new assets over the last three years, which contribute ~40% of the earnings, as per our estimates. To add, Olam’s balance sheet is now in a much better shape, with net debt to equity at 2.5x as on June 2011 compared to ~4x as on June-2008.
Olam is one of the few companies, which delivered positive earnings performance during financial crisis (core earnings in 08 and 09 were up ~38% and ~20% respectively). A closer look at its margin performance reveals that its margins went up/remained stable for most of the segments even when commodity prices were collapsing (signal that hedging strategies work). But since its balance sheet was stretched 3 years back, thus the valuations got de-rated significantly during the last crisis (low P/E of 9x at the peak of the crisis period). Please note that Olam is currently trading at ~14x CY12 earnings.
What happened in 2008? We went back to see the impact the previous financial crisis had on the volumes and margins of midstream players.
We found that, for Olam, volumes and margins increased for all segments even during the crisis, except for industrial raw materials segment where margins decreased.
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