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.
Valuation
- 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
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http://www.dbsvickers.com/
2016-11-15
DBS Vickers
SGX Stock
Analyst Report
1.94
Up
1.580
