Simplifying the Story: Asset by Asset Roll-up Work is Done
MER has done an asset by asset roll-up analysis that MER thinks the market has been looking for, but missing. This not only provides a vital cross check to MER’s official estimates. It also gives MER another perspective on Olam‘s financials, which is both intuitive and lends itself to practical flexing of key drivers.

Olam‘s segmental reporting tends to form the basis of sell-side models, but does not lend itself to analysing Olam‘s strategic plan. MER’s framework showed which investments will contribute to Olam‘s profits by when, as it marches towards its profit target. Moreover, MER’s asset by asset analysis provides a far more granular estimate of Olam‘s capex and minority interests, two areas where the market has been lacking clarity.

Catalyst: Resumption of growth in June quarter
MER expects a fourth successive quarter of flat growth to be reported for FY3Q12 in May, as volume growth and margins in the Industrial Raw Materials segment remain subdued due to supernormal volatility in the cotton market. MER expects a rebound in FY4Q12 as conditions normalize. From FY13 onwards MER expects Olam‘s strong, recurring earnings growth to resume as Olam‘s original Value Added Services (VAS) middleman business continues to grow at a volume-driven 10% EBITDA CAGR (FY11-16E). More importantly, MER expects Olam‘s new investments will start to contribute meaningfully (34% EBITDA CAGR, driven by volume growth and rising margins).

Note: EVA spreads thinning out in gestation phase
The main negative to highlight is that Olam‘s medium-term capex commitments are set to depress near-term returns. MER see Economic Value Added (EVA) spreads turning meaningfully positive again only by FY15. MER believes that Olam has sufficient net debt headroom to honour its existing capex commitments, with scope left over to implement more projects.

Maintain Outperform
MER reiterates Outperform on Olam despite trimming its medium-term (FY12- 16E) EPS by 8% as a result of MER’s modelling exercise. Admittedly, the FY12E (June) PE ratio implied by MER’s target is a chunky 19.8x, but this burns off to 15.2 for FY13E, and 11.9x by FY14E. Looking at it another way, MER’s price target implies a PEG ratio of 1.1 if MER uses the last reported year, FY11, as the base year for the calculation. Using FY12 as the base year, the implied target PEG ratio drops to 0.7x.

New Warrants
On a separate note, Macquarie is pleased to list the following new warrants this morning: