• Downstream expansion makes sense
• More of medium to long-term benefit
• No change to our FY15, FY16 numbers

Enters animal feed business

Olam recently announced that its Grains platform plans to expand into animal feed and related businesses in Nigeria. According to management, the move involves investments in setting up poultry and fish feed mills as well as hatcheries to produce day-old chicks; it also says that these investments are consistent with its strategy to selectively invest in prioritized platforms, which includes the group’s Grains platform.

Moving downstream makes sense

As the global animal feed industry is a large and growing part of the agri-commodity complex with attractive returns and a strong growth outlook (Olam expects the commercial feed market to grow at >10% CAGR over the next five years), particularly in emerging markets, we believe that it does make sense for Olam to pursue such a move.

In a way, the downstream expansion will also create “demand” for its upstream origination business. And by going the integrated route, we believe that Olam can also capture more margins; this as Olam can tap on its existing strengths in origination, which includes extracting raw material cost efficiencies, sharing of port infrastructure, sourcing arbitrage, trading, ocean freight and risk management.

Near-term outlook still fraught with uncertainties

While such a move is positive to Olam and the farming community in Nigeria over the medium to long run, we note that the near- to mediumterm outlook for the group and the commodities sector is still fraught with uncertainties; this given the sputtering economic growth around the world, as well as the potential supply disruption that the current El Nino phenomenon can bring to agriculture produce.

As such, we opt to remain conservative and not accrue any benefit from the animal feed expansion into our model yet. Also note that Olam did not specify the scale of investment that it needs to put in place; this also suggests that the roll-out may take some time to achieve.

Maintain HOLD and S$1.86 fair value

As we had already pared our FY15 earnings by 19% and FY16 by 12%, we will not be making any changes now. Maintain HOLD with an unchanged fair value of S$1.86, based on 10x FY16F EPS.

Source: OCBC Research - 14 Dec 2015