SG: Olam International (OLAM SP) Commodities

SELL | Share price: SGD1.99 | Target price: SGD1.75 | Downside 12%

In-line with expectations. FY12 results were broadly in-line with expectations, with recurring net profit coming in at SGD355.5m. However, this was helped by a positive tax during the 4th quarter, as well as a SGD11m contribution from commodity financial services; notwithstanding which numbers would have been weaker. It does round up an underwhelming year, with Olam registering a first ever profit decline of 5%. Seen in the light of the equity raising/ aggressive M&A approach, this would have been more negative, with an 18% yoy decline in recurring EPS.

Profit weakness from Industrial Raw Materials. On a segmental basis, IRM was the main drag this year, especially in 2HFY12. Net contribution declined 48% despite volume increase. Other than Cotton, we may continue to see some weakness in the coming quarters if economic conditions remain stagnant. The tomato business in the US also had a poor 4th quarter due to oversupply, as we understand some inventories were liquidated. Most other businesses were on track according to management.

More was paid to banks than shareholders. For FY12, net contribution, a key matrix used by Olam was up 13% while recurring net profit was down 5%. The difference between these two figures mostly relates to overhead costs, depreciation and finance costs. The divergence this year implies that these related costs from its aggressive M&A investments have actually been a drag this year. For example, finance costs increased 27% yoy, and were actually higher than profit to shareholders.

Cash cycle has improved this quarter. Cash-to-cash cycle has improved on a qoq basis from 142 days to 119 days, contributing to a lower adjusted net-gearing of 37% (net debt-equity 189%). However, inventory levels at its IRM segment remains high (from SGD724m in FY11 to SGD1023m in FY12) which we still deem a risk should economic conditions not improve.

Maintain SELL. We think earnings headwind could continue for at least 1-2 more quarters, especially from the IRM segment. We maintain SELL, with a TP of SGD1.75, pegged to 1.2x P/B, given the lack of earnings visibility at the moment.

Source: Maybank Kim Eng Research - 29 August 2012