Food segments drive Olam’s resilient earnings

Strong volume expansion. Olam reported 4QFY11 net profit of S$127.4m, up 38% YoY. Excluding exceptional items, net profit was S$106.2m (+4.9% YoY), above ours and consensus expectations of S$95m and S$67m respectively. 4QFY11 saw volume growth of 24.3% YoY but net contribution (NC) per ton fell a marginal 1.7% YoY, due to recent weakness in industrial raw materials.

Our 3-stage DCF-derived target price of S$2.98, which assumes long-term growth rate of 4%, is lower than our previous target as we raise Olam’s forecast BETA to 1.3x (from 1.2x), and adjusted our FCF assumptions. Olam’s FY12 P/E of 13x is lower than the historical average of 19x.

Olam’s earnings is seen to be resilient due to its high percentage dependence on the food segments. Management’s target of US$1b PAT by FY16 reflects their execution confidence. Lastly, the 5S¢/share FY11 dividend gives a respectable yield of 2.1%. Maintain BUY.

Food-related NC remains strong. For FY11, NC per ton rose 12.4% to S$145, but there was 4QFY11 weakness due to industrial raw materials. Management indicated that they have started to seen recent weakness in demand in this space. For the food-related segments, 4QFY11 NC per ton rose YoY. This led to 4QFY11 NC rising 21.8% YoY. We believe food–related segments (67% of NC) would be more resilient moving ahead, but the weakness in industrial raw materials such as wood and cotton would partly offset the positives.

Gearing has fallen with recent equity fund raising. Net debt to equity was 2.22x, versus Mar 11’s 2.63x. The adjusted net debt to equity ratio was a much lower 0.54x. Adjusting for the equity funds raised in Jul 11, adjusted net gearing will fall to a proforma 0.45x. The lower gearing is a positive in the current environment of heightened uncertainties.