OCBC Securities 2015-08-17: Olam International - HOLD with lower S$1.88 FV.

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OLAM INTERNATIONAL LIMITED O32.SI

HOLD with lower S$1.88 FV 

 1H Op NPAT met 51% of FY forecast
 But overall outlook remains muted
 Lowers peg from 12.5x to 10x

Decent 2Q15 showing 

• Olam’s 2Q15 revenue eased 16% YoY to S$4811.6; this on the back of reduced volumes (down 17%) as it continues to restructure lower margin businesses as part of its strategic plan objectives. But thanks to improved margins, NPAT though jumped 197.6% to S$94.7m; excluding one-off items, operational NPAT still grew 96% to S$95.2m. 
• 1H15 revenue was down 14% at S$7516.3, meeting 44% of our full-year forecast, while reported NPAT tumbled 70.6% to S$126.0m; operational NPAT was actually up 48% at S$223.7m, or about 51% of our FY15 forecast. 
• Olam declared an interim dividend of S$0.025/share, versus S$0.075 (S$0.05 final and S$0.025 special) last year. 

Weighed by Industrial Raw Material Segment 

• For its food business, most segments did relatively well. With the exception of Food Staples and Packaged Food, which saw a sharp 44% decline in revenue on the back of a 26% fall in shipments in the quarter; this due to de-consolidation of its grains business in Africa and also the continued underperformance of the dairy operations in Uruguay. But even then, EBITDA actually improved 55%. 
• On the other hand, the Industrial Raw Materials segment not only saw a fall in revenue (down 35%) and shipment (down 24%), but EBITDA also tumbled 39%; this was mainly due to a reduced contribution from the SEZ business. 

Commodity prices likely to remain weak 

• While management maintains that the outlook for food commodities should still be fairly resilient to any economic slowdown, there is no denying that overall commodity prices are likely to remain weak. And because of the new financial year end in Dec, the seasonality of its earnings have also changed; management now guides for 60-70% of earnings to come in during 1H, while 30-40% will be registered in 2H. 
• As such, we see the need to pare our FY15 earnings forecast by 9%; and in line with the weaker outlook for commodity plays, we are easing our valuation peg from 12.5x FY15F EPS to 10x blended FY15/FY16F EPS, which lowers our fair value from S$2.30 to S$1.88. Maintain HOLD. 

Carey Wong | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-17

HOLD Maintain HOLD 1.88 Down 2.30