Below expectations. We believe Olam 2QJuneFY13 results were slightly below market expectation, but in-line with ours. Net profit excluding exceptional gains was up just 6% yoy to SGD136.1m, bringing 1HFY13 to SGD179.2m. Stripping out biological gains, 1HFY13 net profit comes to SGD147m, against full-year consensus of SGD347m.

Volumes up, but core earnings weak. Similar to the previous quarter, volume growth continues to be strong this year, up 54% yoy for the quarter. However, it is notable that most of the growth came from the Food Staples and Packaged food segment; we understand this is primarily on growth from the grains business, which has big volumes, but structurally lower net contribution per tonne. Net contribution was up 19% yoy for the quarter, contributed broadly across the segments.

Debt and overhead cost continue to bite. We believe the weakness in profit continues to stem from the increasing debt and overhead loads. Employee benefit expenses for the quarter were up 33% yoy, while finance cost continues to balloon, up 36% yoy. To put this into perspective, finance cost of SGD131.4m was similar to net profit. Net debt to equity went up significantly this quarter, to 252% (adjusted net debt/ equity 68%, which is the highest in history). This risk continues to be front-loaded over the next 18 months in our opinion, with estimated capex of SGD1.7b and SGD3.9b debt to be repaid/ rolled over.

Strategy recalibration suggests the ship is not right. During the quarter, management completed a sale&leaseback of 4,795 acres of Almond Orchards California to release SGD68.5m. Management announced that it is likely to recalibrate its strategy. We welcome this move, but at the same time, this suggests that existing strategy/ operations may be inherently flawed.

Maintain SELL. We do not see reason to own the stock, given risk associated with refinancing in the next 18 months. We keep our estimates unchanged, which are still below market consensus. We also think it is prudent to factor in the new warrants which are now theoretically in the money and will account for 16% of existing share capital. We maintain our TP of SGD1.30, pegged to 12x FY13F.

Source: Maybank Kim Eng Research - 08 Feb 2013