DBS Vickers 2015-08-17: Olam International - Still a waiting game.


Still a waiting game 

  • 4QFY15 core PATMI triples, and was ahead of expectations. 
  • Solid underlying performance except for Industrial Raw Materials segment. 
  • Re-rating will be difficult in light of delay in achieving positive FCFF targets upon the acquisition of ADM Cocoa. 
  • Maintain HOLD, TP lowered to S$1.97. 

4QFY15 results above. 

  • 4QFYJune15 core PATMI (excl. exceptionals, bio gains and after dividends for capital securities), jumped 303% yo-y to S$110.3m. This took FY15 profit to S$404.9m, which was above our S$316.6m estimates. The outperformance was due to lower net interest costs and overestimation of Olam’s minority interests. 
  • However, underlying 4QFY15 EBITDA was in line at S$285.1m (+6% y-o-y). All divisions reported improvements (+10- 55%) in EBITDA with the exception of Industrial Raw Materials (- 39%) which was impacted by lower fertiliser trading and reduced contribution from the SEZ (special economic zone) in Gabon. 
  • Free Cash Flow to Firm (FCFF) remained positive at S$14.9m but was down from S$120.2m in 3QFY15 on account of lower asset disposals. Olam declared DPS of 2.5 Scts. 

Positive FCFF still a year away. 

  • With the impending US$1.3bn acquisition of ADM Cocoa in 4QCY15 (slippage from 3QCY15 previously), Olam will miss its target of achieving positive FCFF this year, although Olam has reiterated that it still intends to be positive FCFF in CY16. 
  • Nevertheless, despite the inherent value of Olam’s assets, with investors increasingly focused on cashflows following the recent controversy surrounding Noble, we believe investors will continue to adopt a wait and see approach before being convinced of Olam’s ability to generate cash on a sustainable basis. Thus, we see limited re-rating catalysts in the near term. 

Maintain HOLD. 

  • With Olam moving from a June to a December year end, we have introduced our new FY15-17F profit forecasts. 
  • We have also trimmed our TP to S$1.97 from S$2.16, as we impute a lower PE multiple of 9.5x which remains pegged at -1.5 SD. Our TP is an average of our PE (S$1.69) and DCF valuation (S$2.25). 
  • With limited upside to our revised TP, we maintain our HOLD call.

Mervin SONG CFA | http://www.dbsvickers.com/ DBS Securities 2015-08-14
HOLD Maintain HOLD 1.97 Down 2.16