Olam Int'l: BUY with lower S$2.63 fair value (OCBC)

Strong revenue growth in FY11. Olam International Limited reported strong revenue growth in FY11, which jumped 50.5% to S$15.73b, surpassing our forecast of S$13.77b, driven by both higher sales volume and ASPs. Reported net profit (including exceptional items) came in around S$429.8m, up 19.6%; while NPAT (excluding exceptional items) climbed 37.1% to S$372.8m, just above our S$369.4m forecast. For the full year, Olam is recommending a final dividend of S$0.05 per share, in line with our expectations, versus a total dividend of S$0.045 last year.

Robust growth in all business segments. For the year, Olam recorded strong growth in all its business segments. Heading the list was Industrial Raw Materials, where revenue surged 62.5%, as volume climbed 13.4% and ASP jumped 43.3%. Next came Confectionary & Beverage Ingredients, which posted a 55.9% revenue growth, driven by a 15.2% volume growth and a 35.3% ASP growth. Edible Nuts, Spices & Beans saw a 46.6% revenue jump as volume grew 15.0% and ASP rose 27.4%. Food Staples & Packaged Foods brought up the rear, with sale growth of 33.6%, as volume jumped 27.9% and ASP added 4.5%.

But gross contribution margins were flat or lower. While Olam was able to sustain its gross contribution growth at 38.8% versus 38.0% in FY10, we note that gross contribution margins across its segments were either flat or slightly lower, causing the overall gross contribution margin to slip 100bps to 9%. As a result, overall gross margin fell nearly 300bps to 17.6% in FY11; higher operating costs also caused EBIT margin to tumble 90bps to 5.2%, while reported net margin slipped 60bps to 2.1%.

Olam positive about FY12 prospects. Citing the strong performance in FY11 and the continued execution of its long-term strategic growth plans, 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.

Maintain BUY albeit with lower fair value. While we largely share Olam's optimism about its relatively resilient food-related commodities business, we cannot ignore the looming global economic uncertainties. So even as we revise up our FY12 revenue estimate, we pare our core earnings estimate due to lower margin assumptions. As we are also lowering our valuation peg to 18x FY12F EPS from 19x previously, our fair value drops to S$2.63. Maintain BUY.