Maybank upgrades Olam investment outlook after de-risking move

Worst now over, research firm says.

Maybank has enacted a rating change to HOLD for Olam International after the management made a strategic move to de-risk the group’s balance sheet.

"After recent years of acquisition spree, management has shifted its focus towards de-risking the group’s balance sheet. This is a necessary and sensible move to regain investor confidence," said Maybank.

The research firm cautioned though that even if management is hopeful of turning the group into a free cash flow positive territory by FY6/14, "we think it may be too optimistic and believe this could be delayed to FY6/15."

"While operationally, the worst appears to be behind us, the group’s fortunes will continue to be held hostage by volume growth and commodity prices volatility," Maybank further warned.

"We expect slower volume growth (7.5% CAGR for FY6/14-16F) due to a scale-back in capex (guidance for FY6/14-16 cut by SGD1b), suggesting slower earnings growth ahead. Also, its leveraged balance sheet makes it vulnerable to a spike in global interest rates," it added.

"In our view, Olam’s highly leveraged balance sheet is unlikely to improve significantly given the large working capital required to support its full value chain operations that starts with upstream plantation to downstream consumer products," said Maybank.