Biological gains helped profitability. Headline profitability of SGD53.2m for 1QFY13 was in-line with expectations, showing a yoy growth of 26%. However, the comparison was not strictly the same, given that there was no revaluation gain of biological asset in the corresponding period last year. Excluding this SGD10.1m, 1QFY13 net profit would show a marginal yoy decline.

Seasonally weak quarter. First quarter is typically a seasonally weak quarter accounting for 8-10% of full-year profit, which might not be a good indicator of full-year progress. From this financial year onwards, Olam will report a revaluation (gain/loss) on its biological asset on a quarterly basis, rather than half-yearly basis; hence the absence of a revaluation gain last year.

Persistent weakness in Industrial Raw Material Segment. The overall softness in Group profitability appears to stem from this segment again, due to the poor demand in countries like China, as well as the delayed forward sale of cotton farmers. Net contribution was down 4% yoy even though volume was up 13%. Management expects some margin recovery in 2H13.

Significant volume growth mainly from grains. Overall Group volume grew almost a hefty 98% this quarter, but this is largely due to the Food Staples & Packaged Food segment, and more specifically, grains, which has both a big volume as well as different seasonality to existing products. This is a higher volume, low margin business, where management has been building out origination volumes in Australia, Russia and Ukraine.

Maintain SELL. Adjusted net gearing increased from 37% to 57% this quarter, and will likely head north given the capex requirements for its Gabon fertilizer plant. However, management remains comfortable with a net debt/ equity of 2.5x (currently 2x) and reiterated there will be no further need for equity-linked fund-raising till it turns cash-flow positive in 2015/2016. We maintain our TP of SGD1.75, pegged to 1.2x P/B, and our HOLD recommendation.

Source: Maybank Kim Eng Research - 15 Nov 2012