Olam International valuations look stretched

FY14 results below our forecast
Olam posted a weak set of 4QFY14 results, with revenue down 11.4% YoY at S$5757.7m, after volume shipped fell 18.6% to 3498.3k MT. Reported net profit slipped 43.9% to S$31.8m; although Olam notes that operational PATMI was up 1.5% at S$48.5m. However, we note that core earnings of S$31.7m (excluding exceptionals and fair-value gains) was down 7.8%. FY14 revenue fell 6.6% to S$19421.8m, or about 15.7% below our forecast, while reported net profit jumped 67.8% to S$608.5m; though Olam noted that operational PATMI was actually down 6.7% at S$325.4m. We estimate that core earnings would have come in around S$364.1m, but still about 8.4% below our number. Olam declared a final dividend of S$0.05/share as well as a “special silver jubilee” dividend of S$0.025, versus a final of S$0.04 last year.

Still committed to its FY14-16
Strategy Plan Olam stressed that the fall in volume shipment was intentional and also part of its strategic plan to sharpen its focus on relevant businesses. For FY15, it expects to release ~S$313.1m of cash, generate a P/L gain of S$22.4m, and add S$118.8m to its capital reserves from divestment initiatives already announced but pending completion. It has also slowed its pace of investments, and it expects to spend around S$500m in FY15 on capex, about the same as FY14, although it does not rule out additional spending if there are very good acquisition opportunities.

Still not FCFF positive yet
However, Olam did not quite manage to turn FCFF positive by end FY14 as guided; although it did end with a slight S$28.7m deficit versus –S$355.7m in FY14. We note that FCFE remains a large S$504.6m deficit due to its high interest burden (but Olam is confident of bringing it down somewhat).

Higher S$2.38 FV; run-up overdone
We have revised our FY15 estimates and introduced FY16 forecasts. We are also improving our valuation peg from 10x to 12.5x (5-year average), which raises our fair value from S$1.85 to S$2.38 (still based on FY15F EPS). However, given the steep run-up, we think that current valuations appear slightly stretched, hence we maintain our SELL rating.