generally accounts for 5-10% of full year earnings. Net contribution (NC) rose 24% YoY, with growth from the three food segments and a marginal contraction in the industrial raw materials space. However, if we strip out the S$10m gain from biological assets (nil in 1QFY12), net profit would have been flat YoY. We remain positive on the food space, given the YoY doubling of food tonnage. Maintain BUY on Olam with an unchanged target price of S$2.56, derived from a 3-stage DCF valuation model. Our TP translates to a FY13 P/E of 13x, which is lower than the historical average of 17x.

Less severe decline for industrial raw materials. The three food segments collectively recorded NC growth of 24% YoY. However, the industrial raw materials suffered a 4.2% YoY fall in NC, with the wood business experiencing volume and contribution pressures ' the contraction is less severe versus FY12's 41% decline. We are optimistic that food's (with 89% NC share) continued growth, with a smaller decline for industrial raw materials in subsequent quarters, will drive overall earnings.

Still room to gear up further. Olam re-iterated its stance not to raise funds via new equity, and will depend on debt funding to reach its earnings goal. Net debt to equity of 2.0x is still lower than its target 2.5x. Adjusted for liquid assets, net gearing is a much lower 0.57x.

Other key highlights

Quarterly recognition of biological gains led to increase. Biological gain was S$10m, versus nil for 1QFY12. Olam previously recognised biological gains half yearly but has now started to do so quarterly ' and this led to the gain for 1QFY13.Food drove earnings. Olam reported 1QFY13 net profit of S$43.2m, up 26% YoY. This represents 10% of our FY13F, which is in line as 1Q earnings

generally accounts for 5-10% of full year earnings. Net contribution (NC) rose 24% YoY, with growth from the three food segments and a marginal contraction in the industrial raw materials space. However, if we strip out the S$10m gain from biological assets (nil in 1QFY12), net profit would have been flat YoY. We remain positive on the food space, given the YoY doubling of food tonnage. Maintain BUY on Olam with an unchanged target price of S$2.56, derived from a 3-stage DCF valuation model. Our TP translates to a FY13 P/E of 13x, which is lower than the historical average of 17x.

Less severe decline for industrial raw materials. The three food segments collectively recorded NC growth of 24% YoY. However, the industrial raw materials suffered a 4.2% YoY fall in NC, with the wood business experiencing volume and contribution pressures ' the contraction is less severe versus FY12's 41% decline. We are optimistic that food's (with 89% NC share) continued growth, with a smaller decline for industrial raw materials in subsequent quarters, will drive overall earnings.

Still room to gear up further. Olam re-iterated its stance not to raise funds via new equity, and will depend on debt funding to reach its earnings goal. Net debt to equity of 2.0x is still lower than its target 2.5x. Adjusted for liquid assets, net gearing is a much lower 0.57x.

Other key highlights

Quarterly recognition of biological gains led to increase. Biological gain was S$10m, versus nil for 1QFY12. Olam previously recognised biological gains half yearly but has now started to do so quarterly ' and this led to the gain for 1QFY13.

Surge in grain volumes, but NC per ton fell due to lower margins for grains. The 115% YoY rise in food volumes is largely driven by the food staples and packaged foods segment, which recorded a 190% YoY volume expansion. This is due to the grains business, attributed to increasing milling volumes in Africa, and origination volumes across Australia, Russia and Ukraine. However, the inherently low margin for bulk products such as wheat, sugar and rice led to a halving of NC per ton YoY for this food staples and packaged foods segment.

Some stabilisation in industrial raw materials segment. The industrial raw materials segment recorded volume growth of 13% YoY. The cotton business has seen volume recovery and Olam expects more normalised margins from 2HFY13. However, the wood business continues to be lacklustre.

 

Surge in grain volumes, but NC per ton fell due to lower margins for grains. The 115% YoY rise in food volumes is largely driven by the food staples and packaged foods segment, which recorded a 190% YoY volume expansion. This is due to the grains business, attributed to increasing milling volumes in Africa, and origination volumes across Australia, Russia and Ukraine. However, the inherently low margin for bulk products such as wheat, sugar and rice led to a halving of NC per ton YoY for this food staples and packaged foods segment.

Some stabilisation in industrial raw materials segment. The industrial raw materials segment recorded volume growth of 13% YoY. The cotton business has seen volume recovery and Olam expects more normalised margins from 2HFY13. However, the wood business continues to be lacklustre.

Source: OSK