UOB Kay Hian 2015-08-17: Olam International - 2Q15: Results Above Expectations; 2H15 Could See One-off Expenses.

OLAM INTERNATIONAL LIMITED O32.SI

2Q15: Results Above Expectations; 2H15 Could See One-off Expenses

Olam reported 2Q15 core net profit of S$95.2m (+25.9% qoq, +96.2% yoy) and 1H15 core net profit of S$224m (+48.4% yoy). 1H15 earnings make up 66% of our and 58% of consensus full-year forecasts.
Results were above expectations on better-than-expected performance from the Food Staple & Packaged Food segment.
We see a challenging 2H15 on currency volatility, restructuring expenses from the Uruguay dairy farming operations and cost incurred in the incorporation of the ADM cocoa business.
Maintain HOLD. Target price: S$1.95. Entry price: S$1.65.

Olam International (Olam) reported 2Q15 core net profit of S$95.2m (+25.9% qoq, +96.2% yoy) and 1H15 core net profit of S$224m (+48.4% yoy). 1H15 earnings make up 66% of our and 58% of consensus full-year forecasts. Results were above expectations on better-than-expected performance from the Food Staple & Packaged Food segment.

This came as a surprise as commodity prices were lower yoy. Management attributed the good margins to its effort to divest and discontinue low-margin products. We fine tune our earnings estimates on a slightly higher EBITDA margin assumption of S$34/tonne vs S$25/tonne previously (2014: S$33.1/tonne).

It will pay an interim dividend of 2.5 cents/share. Ex-date is 23 Aug 15 and payment is on 31 August.

Management said the dairy business in Uruguay remains challenging. Olam will stop further investment there and restructure the unit.

During the briefing, management mentioned that expenses in 2H15 could rise due to the restructuring of its Uruguay dairy business (to reduce the number of farms and cows) and cost incurred in the incorporation of ADM Cocoa, which is expected to complete in 4Q15.

We raise our net core profit forecast for 2015 by 10% to factor in higher EBITDA margin at the Food Staples & Packaged Foods segment of S$34/tonne vs S$25/tonne previously (2014: S$33.1/tonne). However, this is offset by one-off expenses of S$50m. Management did not provide guidance for the one-expenses related to the Uruguay dairy farm restructuring. Our new 2015 net profit forecast is S$323.3m (previously S$339.2m). Our 2016 and 2017 forecasts remain unchanged.

Due to its diversified business portfolio and geographical exposure, Olam has transactional currency exposure, mainly in US$, GBP, euro, A$ and S$. Based on Olam’s 2014 annual report, fluctuation of the S$ against the euro has the highest impact on Olam’s pre-tax profit. Based on the sensitivity provided, every 0.5% strengthening of the euro against the S$ would have reduced Olam’s 2014 pre-tax profit by 1%.

Maintain HOLD with a lower target price of S$1.95 (previously S$2.20 pegged at 12.6x 2016F PE), pegged to 11.2x 2016F PE, or 1SD below its 5-year mean. Entry price is S$1.65. Maintain HOLD as there is no near-term share price catalyst and earnings risks are relatively high, given the current volatility in currencies and commodity markets.

Singapore Research Team | http://research.uobkayhian.com/ UOB KH 2015-08-17

HOLD Maintain HOLD 1.95 Down 2.20