2QFY6/14 results are slightly below expectations, mainly due to volume drop and biological loss.

Business outlook still hazy, not helped by wide exposure to upstream operations and sensitivity to rising interest rates.

Maintain HOLD given the uncertainty facing the stock.

Results a tad below expectations

Olam’s 2QFY6/14 results came in slightly below our expectations, with net profit declining by 13% YoY to SGD134.9m. The earnings miss can be attributed to (1) an 8.0% drop in revenue caused by volume decline across all business segments, and (2) a SGD15.4m biological loss vs a SGD22.1m biological gain over the same period last year. Almond, onion, cocoa and cotton were the key outperformers in the company’s portfolio, while dairy, grain and rice were the main drag. For now, we think the outlook for Olam’s business is still hazy. Its wide exposure to upstream operations is a key concern, as this business may be hit if commodity prices were to fall. Also worrying is its high sensitivity to rising interest rates. Maintain HOLD and TP of SGD1.57.

Headwinds persist

In our view, headwinds will likely persist in FY6/14-15. The recurrence of biological loss is highly possible in 2HFY6/14, given the current maturity profile of Olam’s biological assets and potentially lower commodity prices. Moreover, uncertainty hangs over several agri-commodities in its portfolio this year and next, including tomato (drought in California may impact next crop season and cause supply shortage), coffee (dry weather in Brazil and coffee rust disease), and cotton (China has decided to phase out its current stockpiling system and sell its national reserves, which account for almost 60% of global inventory).

Source: Maybank Kim Eng Research - 17 Feb 2014