Olam International - Dragged by the markets (DBSVickers)

HOLD S$2.35 STI : 2,701.17

Price Target : 12-Month S$ 2.15 (Prev S$ 2.55)

Reason for Report : Company update, forecasts and TP revisions

Potential Catalyst: Gabon urea project in 1QCY12

DBSV vs Consensus: Lower FY12F-13F earnings due to lower volume growth forecasts

• FY12F-13F earnings raised by 8-13% on commodity price adjustments and changes in FX rates

• DCF-based valuation cut to S$2.15 with higher ERP of 10.5% from 6.5% previously

• Applying peak ERP seen in 2008 GFC would imply a further 32% downside in share price

• Hold. More upside when financing closing for Gabon urea project materializes (expected 1QCY12)

FY12F-13F earnings raised by 8-13%, after we imputed new debt syndication, sugar milling acquisition, higher commodity price estimates and changes in FX rate forecasts; while our volume growth assumptions remain unchanged, except for slightly higher Confectionary & Beverage segment. We expect Olam to deliver 44% y-o-y growth in FY12F core net profit, followed by flat growth in FY13F on lower FX gains. Our forecasts are below consensus, as we employed lower volume growth rates relative to historical performance.

Valuation reduced. Despite higher earnings estimates, we have lowered our TP by 16% to S$2.15 due to use of higher equity risk premium (ERP) in our DCF calculations (WACC 10.5%, Rf 2.2%, B 1.3, TG 3%). Implied ERP movements since 2000 have empirically shown that risk aversion heightens ahead of weak GDP growth. Since Jun11, implied ERP in Singapore stock market have indeed priced-in expectations of slower GDP growth ahead. Based on our inhouse GDP growth forecast, we now impute ERP of 10.5% from 6.5%.

Worst-case scenario explored. Trough DCF valuation based on peak ERP of 14.4% during the 2008 global financial crisis could see a 32% downside from current share price to S$1.59.

Maintain Hold with 9% downside to revised TP. In the absence of any acquisitions, we do not foresee any potential catalysts until 1QCY12, when its Gabon urea project is expected to secure financial closing.