SG: Olam International (OLAM SP) Materials

Share price: SGD2.06 | Target price: SGD1.60 | SELL | Downside 22%

4th quarter to round up an underwhelming year. Olam will announce 4QFYJun2012 results next Tuesday, 28th August, in what will likely be its first ever full year net profit decline since listing in 2004. While we don’t foresee any huge profit swings, numbers are likely to disappoint. We expect 4th quarter recurring net profit to come in at SG75m, with our FY12 net profit forecast of SG336m against consensus of SG347m.

Profit weakness likely to stem from IRM segment. Year-to-date, the Industrial Raw Materials segment, which is most sensitive to economic cycles have underperformed. While management has guided for Cotton to be a drag into the 4th quarter, the yoy impact may still disappoint, bearing in mind that 4Q11 was a record quarter for this segment, making up 33% of group net contribution. For 4Q12, the only additional qoq consolidation will be that of USD167m Nigerian biscuits and candy maker, though that’s unlikely to make a major impact.

Things to watch out for. Inventory has been building up over the past twelve months, up SGD790m (100 days to 115 days) despite lower commodity prices. With about 12% of its inventory unhedged, this represents a risk factor in light of the price environment for industrial products. Management has done well to keep overhead expenses tight against the lack of earnings growth this year; however finance costs have been more difficult to control with a larger debt profile.

No major impact from US droughts. The US droughts which have driven up the prices of soybeans, corn and wheat are only likely to have a slight negative impact on Olam, given that their only product exposure is to wheat, which is a raw material input for their milling operations in Nigeria. Management originally guided this business to contribute US23.3m in FY12F profit, which is not substantial to bottomline.

Maintain SELL. Olam segmented its earnings by value chain in its last full-year presentation and we expect this trend to continue this time round. This will help paint a better picture on the traction of its M&A strategy. The frequent equity-raising in support of this strategy has not borne fruit this year, as evident by the 18% EPS decline ytd even while profit was flat. We maintain SELL, with a TP of SGD1.60, pegged to 1.1x P/B to reflect earnings risk.

Source: Maybank Kim Eng Research - 23 August 2012