Olam International - DBS Research 2017-03-01: Waiting on the sidelines

Olam International - DBS Vickers 2017-03-01: Waiting on the sidelines OLAM INTERNATIONAL LIMITED O32.SI

Olam International - Waiting on the sidelines

  • 4Q16 core profit of S$70.8m (-2% y-o-y) below expectations on higher taxes.
  • However, underlying 4Q16 EBITDA (+34% y-o-y) was ahead due to elevated cocoa combined ratios. 
  • Free cashflows still negative but operating cashflows pointing in the right direction.



Investors still on the sideline for now. 

  • We maintain our HOLD call on Olam International (Olam) with a revised TP of S$2.12.
  • While Olam appears to have successfully integrated the US$1.2bn acquisition of ADM Cocoa, we have yet to see consistent delivery of positive free cash flow and earnings growth. 
  • In addition, with return on equity (ROE) still suboptimal, we believe a re-rating beyond its average PE multiple of 16x is unlikely at this stage, and Olam’s share price is likely to trade range bound in the near term. 
  • However, with Olam periodically conducting share buybacks, risk of a significant fall in its share price is mitigated.


Significant medium-term upside on successful execution. 

  • While we are cautious on Olam’s near term share price performance, there is significant upside over the medium term if the group successfully executes on its plans. 
  • Currently, Olam has S$5.1bn worth of immature assets which, on maturity, could generate an additional c.S$0.76bn-1.26bn of EBITDA. This is on top of any earnings from new investment opportunities that Olam undertakes with its new partner, Mitsubishi Corporation, which took a 20% interest in the group. 
  • All these factors may enable Olam’s share price to re-rate closer to S$2.23 and S$2.75, price levels at which Temasek and Mitsubishi acquired their most recent equity interests in Olam respectively.


Low free float. 

  • Given Olam’s small free float of c.20% and high gearing relative to other listed companies in Singapore, we believe the majority of investors may continue to shun the stock in the near term.


Valuation

  • We raised our TP, which is an average of our PE and DCF valuations, to S$2.12 from S$1.94. 
  • Our TP is a blend of our PE valuation of S$2.14 and our DCF valuation of S$2.10.


Key Risks to Our View: 

  • The key risk to our neutral stance is a faster than expected delivery of earnings from Olam’s gestating/immature assets.
  • On the downside, with gearing in excess of 1.5x, Olam’s earnings are vulnerable to a significant rise in interest rates.



Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2017-03-01
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.12 Up 1.940



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