Olam International - OCBC Investment 2016-05-13: Maintain HOLD with Lower S$1.615 FV

Olam International - OCBC Investment 2016-05-13: Maintain HOLD with Lower S$1.615 FV OLAM INTERNATIONAL LIMITED O32.SI 

Olam International - MAINTAIN HOLD WITH LOWER S$1.615 FV

  • 1Q core met 30% of FY16 forecast
  • But margins are improving QoQ
  • HOLD with lower S$1.615 FV

1Q earnings below seasonal trend

  • Olam reported its 1Q16 results this morning, which in came weaker than expected. Revenue grew 10% YoY to S$4,761.4m, meeting 23% of our full-year forecast, as shipments also grew some 11%. 
  • Reported PATMI surged 213% to S$113.6m, but mainly due to lower exceptional charge (-87%) in the quarter; this relating to buybacks of high-priced bonds in both periods. 
  • Operational PATMI though declined 6% to S$126.1m; while it still met about 30% of our FY16 estimate, it tracked below Olam’s 35-40% seasonal earnings contribution.

But overall margin saw sequential improvements

  • Having said that, we note that overall EBITDA margin has been improving sequentially after dipping to a low of 4.4% in 3Q15, and is back to 7.0% in 1Q16; this as management continues to restructure and prune off non-performing businesses. 
  • Recall that Olam’s dairy farming operations were previously underperforming. But in the latest quarter, management noted that both its operations in Russia and Uruguay have performed well with improvements in operating parameters. This also led to Food Staples & Packaged Foods division’s EBITDA margin rebounding back to 7.1% in 1Q16, versus 2.3% in 3Q15 and 2.8% in 4Q15. 
  • Separately, its Industrial Raw Material segment saw the highest EBITDA margin of 12.0%, led by its Cotton and Wood Products businesses, despite lower segment revenue due to lower prices across all commodities within the segment.

Still committed to turning FCFF positive

  • Despite Olam slipping further into negative FCFF to the tune of S$156.0m in 1Q16, mainly due to the acquisition of wheat milling assets in Nigeria, management stresses that it remains committed to turning FCFF positive by end 2016. 
  • We have adjusted our model to account for higher depreciation, and this results in an 8% fall in our FY16F earnings. 
  • Our fair value also eases from S$1.67 to S$1.615, now based on blended FY16/FY17F EPS versus FY16F previously, with valuation peg kept at 10x. 
  • Maintain HOLD; accumulate closer to S$1.55.

Carey Wong CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-05-13
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.615 Down 1.67