Published September 22, 2008

Olam shares may fall even further: ABN

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SHARES of Olam International Ltd, the agricultural commodities supplier that has declined by a third this year, may plunge another 50 per cent in the next 12 months as commodity prices sink, ABN Amro Holdings NV said.

The stock could fall to 94 cents in 12 months, ABN's Singapore-based analyst Nirgunan Tiruchelvam wrote in a report last Friday, initiating coverage. That's the lowest of the 16 analysts rating the company, according to data compiled by Bloomberg. They have an average target price of S$2.60.

A decline in commodity prices could hurt the seller of food ingredients including coffee, cocoa, cotton and edible nuts, the analyst wrote. The UBS Bloomberg Constant Maturity Commodity Index has plunged 24 per cent from a record on July 3 as financial turmoil intensified concerns that global growth may slow and reduce demand for commodities.

'A reversal in commodity prices presents potential dangers,' Mr Tiruchelvam wrote. 'Olam's business model has several vulnerabilities.'

The forecast comes after Olam said on Sept 15 that it plans to invest US$128.4 million in sugar-refining and wheat milling in Nigeria. Olam's ratio of debt to equity at 3.4 times 'looks stretched', and the company's still acquiring assets, Mr Tiruchelvam said. The ratio, also known as gearing, is a measure of a company's health.

For the year ended June 30, Olam raised its equity to S$964 million from S$584 million, which will help the company weather any squeeze in credit markets as banks turn cautious in lending, chief executive officer Sunny Verghese said on Sept 15. -- Bloom-berg