Warrants Highlight

Olam - MER Foresaw Sell-down, Maintains outperform

Macquarie is pleased to list the following new warrant over Olam International this morning:

Yesterday, Olam International saw its share price fall 10.8% to close at $1.785, a level last seen in May 2009, The drop also takes its losing streak to a ninth straight day, its longest since February 2005. The company, which is one of the world’s top three suppliers of rice, cocoa and coffee, had reported a decline in its 3Q12 profit on Tuesday evening.

MER expected Olam shares to come under pressure
In a report published post its results on 15 May, Macquarie Equities Research (MER) stated that they had expected Olam shares to come under pressure post a weak 3Q12, which missed their estimates by 25% due to ongoing weakness in cotton margins, lower-than-expected Food Staples profits and higher finance costs. MER notes that its full-year estimates are in line with consensus.

MER was previously calling for Olam’s growth story to re-ignite with the June quarter (reported in August), especially since this quarter has an easy comparative. But based on the slower-than-expected recovery in cotton and Olam’s muted outlook, it seems MER will have to wait until the September quarter.

Olam shares have already de-rated a lot. MER expects to see downside pressure coming from more EPS cuts. MER sees pressure on medium-term consensus earnings per share in the mid- to high-single digits, with the largest cut to FY12 estimates.

Analysing Olam’s results
Olam’s reported results was below MER’s expectations. Olam’s 3Q12 net profit of $98.7mn came in 12% below MER’s projected $112mn. Revenues at $4.2bn were 21% short of MER’s expected $5.3bn.

Volumes remain strong across the board in the food-related segments but weak in the more cyclical Industrial Raw Materials (IRM). Olam attributed this to reserved selling by Australian farmers (cotton prices too low) and said the weakness could persist through next quarter, pushing the rebound into 1Q13.

IRM net contribution margins remain weak due to the lower throughput and higher provisioning for customer defaults. This is the first time MER has heard of these issues. Food Staples margins were impacted by a mix effect, but the profits really disappointed due to weakness in dairy and sugar. While MER’s estimate was arguably on the high side, Olam seemed disappointed with the result, too.

Finance costs blew out in 3Q12. Working capital interest, which is disclosed separately, was not the reason. MER needs to follow up with management on why the fixed asset-related interest rose so markedly. Olam is also calling for higher-than-usual working capital days through the end of the fiscal year.

Stock rating and price target
Despite the result, MER retains its Outperform rating on Olam with a 12-month price target of $2.80. MER believes that the price catalyst for the stock is likely to come from Olam’s 1Q13 results, usually reported in November.

New HSI warrants this morning
Separately, Macquarie has also listed the following new warrants over the Hang Seng Index this morning:

Singapore Market Wrap

Blood Shed across Asia

After the Greek coalition talks failed, Asian markets took the news pessimistically. The STI fell 1.6% day-on-day (dod) to 2,831.15, while the HSI fell 3.2% and the Nikkei fell 1.1%. STI Put warrant P8CW was quick to take profit after yesterday's market tumble. The warrant P8CW gained 19.1% day-on-day.

Call STI 3000MBeCW120629 (P8BW) exercise level 3,000.*
Put STI 2900MBePW120629 (P8CW) exercise level 2,900.*
Longer-dated Call STI 3100MBeCW130131 (PA7W) exercise level 3,100.*
Longer-dated Put STI 2800MBePW130131 (PA8W) exercise level 2,800.*

OCBC lagged competitors
OCBC fell 2.8% to close at $8.60 yesterday. It underperformed DBS (1.4% dod, $13.58) and UOB (1.7% dod, $18.00). Yesterday's tumble took OCBC below its March low of $8.63.

Call OCBC Bk MBeCW120802 (P1VW) exercise price $9.00.*
Put OCBC Bk MBePW120718 (P2OW) exercise price $8.40.*

Call DBS MB eCW120904 (QC6W) exercise price $14.00.*
Put DBS MB ePW120718 (P2NW) exercise price $12.80.*

Call UOB MB eCW120702 (P0XW) exercise price $17.80.*
Call UOB MB eCW130103 (MW0W) exercise price $19.397.*

Bumitama holding up
Indonesian palm oil producer, Bumitama Agri, was one of the few counters that ended in its positive territory yesterday. Its shares rose 0.6% to $0.885. The company is currently Singapore's largest IPO in 2012, with an IPO price of $0.750 on 11 April.

Call Bumitama MBeCW120702 (P9EW) exercise price $0.85.*
Call Bumitama MBeCW120903 (P9FW) exercise price $1.00.*

Overnight Market Wrap

U.S Stocks Retreat Again

U.S equity markets tumbled again, with the S&P 500 falling 0.4% overnight to close at 1,324.8 and NYMEX crude oil futures falling to US$92.81 per barrel. Investors fled to the safety of U.S Treasuries and the dollar index rallied.

Greece continued to weigh on investors' minds after the European Central Bank said it will temporarily stop lending to some Greek banks after the hung parliament in Greece. Concerns in the Federal Reserve in the U.S also led several policy makers to suggest potentially more quantitative easing on the back of the ongoing European debt crisis and fiscal tightening in the U.S.

Overnight Markets

Indices	Last	Change
STI	2831.15	-1.6%
HSI	19259.83	-3.2%
DJIA	12598.55	-0.3%
S&P 500	1324.80	-0.4%
Nasdaq	2874.04	-0.7%

Corporate News

Corporate Announcements

Results Announcement
Tue 29 May: Biosensors 4Q12

Ex-Dividend Date
Thu 17 May: Yangzijiang ($0.055)