Olam International - Waiting for Gabon (DBSVickers)

HOLD S$2.33 STI : 2,791.89

Price Target : 12-Month S$ 2.55 (Prev S$ 3.00)

Reason for Report : FY11 results/TP revision

Potential Catalyst: Completion of gas due dilligence on fertliser project

DBSV vs Consensus: Lower-than-consensus earnings in FY12F and FY13F due to higher operating expenses and borrowing costs

• FY11 core profit (ex. one-offs and BA gains) of S$302m (+11% y-o-y) – below expectations

• Improvement in Net Contribution (NC) per MT to S$145 (+12% y-o-y) is key highlight

• Revise FY12-14F EPS down by 3-5% on higher operating expenses and borrowing costs

• Maintain Hold, TP lowered to S$2.55 (DCF based)

Core FY11 profit of S$302m (excluding biological asset gains of S$80.4m, negative goodwill of S$91.8m, impairment of S$35.6m and acquisition expenses of S$8.7m) was below our forecast of S$331m and consensus expectations of S$340.5m. This represented 39% y-o-y growth, driven by 21% lift in volumes and increase in group NC/MT from S$129 to S$145, partly offset by 25% higher operating expenses and 51% jump in borrowing costs. Sequentially, Olam reported 24% lower 4QFY11 core earnings to S$78.5m (+71% y-o-y). S$0.05 final DPS declared.

All segments delivered strong volume growth with Food Staples up 28% y-o-y, Confectionary and Beverage up 15%, Edible Nuts up 15% and Industrial Raw Materials up 13%. Group NC/MT improved due to better business mix, with greater contribution from Edible Nuts at S$233/MT (now 24% of NC vs 23% in FY10) and Confectionary and Beverage at S$212/MT (26% of NC vs 25%).

FY12-14F EPS lowered by 3-5% to account for higher operating expenses and borrowing costs, which more than offset upgrades in net contribution from all segments. Imputing these and updated beta of 1.35 (from 1.30), Olam’s DCF-derived TP is now reduced to S$2.55 (WACC 8.9%, Ke 12.3%, Kd 6.1%, TG 3%) from S$3.00 (fully diluted basis).

Maintain Hold. Olam currently trades at FY12 PE of 13.7x with 3-year earnings CAGR of 13.9% (ex BA gains). It is fairly priced for a robust medium term outlook, in our view. Core net profit (ex BA gains) should grow by 28% in FY12F, 6% in FY13F and 9% in FY14F. With limited 9% upside to revised TP, we retain our Hold rating. We see upside of S$0.47 per share if the Gabon project achieves financial close in 1QCY12 – later than our previous expectation of 3QCY11.