Plans are in line with market expectation. Olam announced its muchawaited strategic review, which we believe were broadly in-line with market expectations. While initiatives to improve balance sheet strength and cash flow will be looked upon favorably, this will be weighed against a slower profit growth trajectory. Furthermore, we also observe tacit signs of admission that Muddy Water’s allegations were not entirely without merit.

Free cash flow positive by FY14. Of the 4 key priorities identified by management, we believe the most immediately material is the thrust to accelerate free cash flow generation. Olam plans to become free cash flow positive by FY14, ahead of the previous plan by a crucial 12 month, and more importantly sustain this position from there. Tellingly, this will be done mainly via a reduction in capex rather than a change in business model, since new guidances imply approximately zero net capex from FY14-FY16.

Lower earnings trajectory the trade-off. As part of this plan, management has shed the SGD1b net profit target by FY16, and will also be less explicit about growth/ earnings guidance going forward. Management added two additional metrics to evaluate performance going forward, which is EBITDA and EBITDA/ Average Invested Capital. We are positive on this sign that cash returns will be a bigger focus going forward rather than accounting earnings.

Tacit signs of admission. In a sign that its original bet may have been misplaced, management is now seeking to 1) sell down its stake in the Gabon Fertilizer project, with an added likelihood that Tata may not take up its original 25% stake option and 2) seek to reduce overall project cos. It is also seeking to restructure underperforming businesses such as wood and dairy.

Positive plans on paper, execution is key. Maintain SELL. We also welcome the thrust to enhance stakeholder communication, although we expect that time will be needed for both the equity and debt risk premium to be restored. Current share price has likely priced in this strategic recalibration. We maintain our SELL call, with a TP of SGD1.37, which is pegged to 15X FY13F.

Source: Maybank Kim Eng Research - 26 Apr 2013