Current S$2.37
Target S$3.17
Previous Target S$3.17
Up/downside 33.8%
Olam stands out among peers for its recession-proof portfolio and earnings track record. It proved its mettle in 3QCY11 when peers had fallen prey to economic turbulence.
Olam remains our top pick in the commodities sector. Fears over its cotton exposure have been overdone, in our view. Valuations are attractive at 1 std deviation below its historical 6-year mean. We maintain our forecasts, Outperform and TP (15x CY13 P/E).
Anchored by defensive portfolio
We expect Olam to outperform its peers as investors come to appreciate its earnings resilience amid macroeconomic uncertainties. While industry players have been caught by gyrating commodity prices and slowing demand, Olam has continued to lift its earnings, volume and margins. A defensive portfolio, comprising mainly demand-inelastic edibles, is a desirable trait, especially in uncertain times.
Cotton fears overdone
We believe recent fears of potential cotton impairments have been overplayed. The worst should be over as cotton markets are back in contango.
Olam was not spared from industry-wide defaults, but these had been accounted for in 4QFY11 and 1QFY12. Its cotton division remained profitable throughout and we do not expect a resurgence of the same problems.
Financial flexibility
We believe Olam is in a position to capitalise on M&A opportunities amid industry consolidation, thanks to its strong balance sheet and access to Asian sources of funding.
We see value emerging at 1 std deviation below its historical 6-year mean. Our TP remains based on 15x CY13 P/E, its mean during the 2009 downturn.
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