Olam International - DBS Research 2016-11-15: In holding pattern for now

Olam International - DBS Vickers 2016-11-15: In holding pattern for now OLAM INTERNATIONAL LIMITED O32.SI

Olam International - In holding pattern for now

  • 9M16 core profit of S$245m (-8% y-o-y) below expectations.
  • ADM Cocoa successfully integrated with tailwinds from elevated cocoa processing margins.
  • Maximising earnings of existing assets is the next step.

Investors on the sideline for now. 

  • We maintain our HOLD call on Olam International (Olam) with a revised TP of S$1.94. 
  • While Olam appears to have successfully integrated the US$1.2bn acquisition of ADM Cocoa, we have yet to see consistent delivery of positive free cash flow and earnings growth. 
  • In addition, with return on equity (ROE) still suboptimal, we believe a re-rating beyond 15x PE multiple is unlikely, and Olam’s share price is likely to trade range bound in the near term. 
  • However, with Olam periodically conducting share buybacks, risk of a significant fall in its share price is mitigated.

Significant medium-term upside on successful execution. 

  • While we are cautious on Olam’s near term share price performance, there is significant upside 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. This is on top of any earnings from new investment opportunities that Olam undertakes with its new partner, Mitsubishi Corporation, which 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.

Low free float. 

  • Given Olam’s small free float of c.20% and high gearing relative to other listed companies in Singapore, we believe the majority of investors may continue to shun the stock in the near term.


  • We raised our TP, which is an average of our PE and DCF valuations, to S$1.94 from S$1.58. 
  • We lifted our PE valuation to S$1.83 from S$1.58 as we based our target PE at 10.3x, which is pegged to -0.5SD forward PE from -2SD previously, to better reflect the reduced earnings risk following the successful integration of ADM Cocoa. However, we trimmed our DCF valuation to S$2.05 from S$2.10 after lowering our earnings estimates.

Key Risks to Our View

  • The key risk to our neutral stance is a faster than expected delivery of earnings from Olam’s gestating/immature assets.
  • On the downside, with gearing in excess of 1.5x, Olam’s earnings are vulnerable to a significant rise in interest rates.

Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.94 Up 1.580