Olam Q1 earnings up 15.1%

OCBC - Fair Value S$2.63.

1QFY12 within expectations. Olam International Limited reported a pretty decent start to FY12, with revenue rising 31.6% YoY to S$3229.4m, meeting 17% of our FY12 forecast, driven by strong 17.7% increase in its sales volume to 1.86m metric tonnes. Reported net profit came in around S$34.2m, up 15.1% YoY, meeting 11% of our full-year estimate. Management noted that these results were particularly encouraging given the very difficult macroeconomic backdrop. While the results show a sequential drop of 28.6% in revenue and 68.3% in core earnings, we are not perturbed as its first quarter earnings typically make up just 5-10% of its full-year performance.

Food business shows its resilience. In terms of revenue breakdown, food category made up 80.5% of total revenue and 83.2% of volumes. With sales volume for food increasing by 19.7%, this reflected its relative resilience to recession. Meanwhile, Industrial Raw Material accounted for the remaining 19.5% of revenue and 16.8% of volumes; and as this segment was more recession sensitive, management noted that it was adversely impacted in 1Q12. In particular, Olam singled out the cotton sub-segment as being the most affected due to very high volatility in cotton prices and weakening demand due to macro-economic uncertainty. While management expects the cotton business to face another difficult quarter, it notes that the situation has largely "normalized". It added that its cotton business was in the black in 1QFY12, aided largely by its ginning business in Australia. On the other hand, its Commodity Financial Services (CFS) business registered a quarterly loss of S$2.8m (versus S$4.4m profit in 1QFY11) due to exceptional volatility in commodity prices.

Olam positive about FY12 prospects. Despite the growing macroeconomic uncertainty, Olam says it continues to be positive about its prospects for FY12. Notably, management notes that the investments (both upstream and midstream) made over the past two years of the strategic planning cycle have strengthened its business, enhanced its competitive position and improved the quality of its earnings. Management also alludes to a strong deal pipeline and has maintained its original target of achieving S$1b of pre-tax earnings by 2016.

Downgrade to HOLD. As the results were mostly in line with our forecasts, we opt to leave our estimates intact for now. At an unchanged 18x FY12F EPS peg, our fair value also remains at S$2.63. But given the limited upside potential from here, we hence downgrade our call to HOLD and would be buyers around S$2.35.


AM Fraser

Olam International saw a 15.1% year-on-year jump in 1Q net profit to $34.2mil, with an overall rise in sales volumes helping to lessen the impact of lower net contribution from its cotton business. EPS was 1.4 cents (on enlarged share base). NTA was $1.1121 as at end-September. Cash and cash equivalents held came to $964.8mil. Revenue rose 31.6% to $3.23bil, with turnover rising for all of its business segments. Cash and cash equivalents held came to $964.8mil. The group added that it is currently in acquisition and joint venture discussions with various parties, and that it remains positive about its prospects for fiscal year 2012. The company was 'very confident' of achieving its FY2016 net profit target of US$1bil.