OLAM INTERNATIONAL LIMITED
O32.SI
Olam International - Holding pattern for now
- 4Q15 core profit of S$66.9m (-41% y-o-y) below expectations
- FY16-17F core earnings raised by 5-6% after incorporating recent BUA Group acquisition
- Awaiting delivery of free cash flow targets and successful integration of ADM Cocoa acquisition
Investors on the sidelines for now.
- We maintain our HOLD call but lowered our TP to S$1.58 from S$2.01.
- We believe investors will remain on the sidelines until Olam delivers on its positive free cash flow targets by 2016 and successfully integrates its recent US$1.2bn acquisition of ADM Cocoa.
Significant medium-term upside on successful execution.
- While we are cautious near term, there is significant upside to Olam’s earnings over the medium term if the company successfully executes on its plans.
- Currently, Olam has S$4.9bn worth of immature assets which, on maturity, could generate an additional c.S$0.6-1.1bn of EBITDA.
- In addition, a successful integration of ADM Cocoa should deliver US$35-40m worth of synergies. This is on top of any incremental earnings from new investment opportunities Olam has with its new partner, Mitsubishi Corporation, which recently 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.
Negative sentiment and low free float.
- Given the negative sentiment surrounding other commodity trading companies such as Glencore and Noble Group, we believe investors may continue to shun the sector and/or Olam in the near term. This is especially in light of Olam’s small free float of c.17.5%.
Valuation:
- To better reflect investors’ short-term bias, we now base our TP purely on a PE valuation from an average of PE and DCF valuations.
- Given significant de-rating of its peers, we also cut our PE valuation and TP to S$1.58 from S$2.01 as we peg to - 2SD forward PE of 10.3x versus -1SD PE of 13.5x previously.
Key Risks to Our View:
- The key risk to our neutral stance is earlier-than-expected delivery of synergies from the ADM Cocoa acquisition and/or stronger earnings on the back of a faster turnaround of the dairy and packaged food businesses.
Mervin Song CFA
DBS Vickers
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http://www.dbsvickers.com/
2016-02-29
DBS Vickers
SGX Stock
Analyst Report
1.58
Down
2.01
