Nomura predicts Olam may give up chasing Carson Block, Muddy Waters

It hasn't been successful in serving notices.

Nomura recently went to Olam's analysts' briefing. Olam’s 2Q13 net adj earnings were at SGD121mn (adj for bio gains and the sale of land), up 15% y-y and in line with SGD117mn forecast. 1Hnow forms 48% of full-year figures (48% of Nomura estimate, and 46% of consensus).

A key negative from the results was discontinuation of the sugar asset purchase in Brazil; however, positives were volume growth in edible nuts, food staples and a recovery in cotton markets. Nomura expects a subdued stock reaction.

Here are 12 key takeaways from the briefing:

1. One-off gain was from the sale of the almond orchards land in the US, where the company booked ~USD19mn net of tax. Olam continues to operate the land and enjoys productive economics from the land.

2. Minority interest was a big swing from the gain of SGD24mn to a loss of ~SGD3mn (mostly because of Rusmolco and NZFSU).

3. Bio gains for Q2 were SGD22mn.

4. Olam called off the sugar asset acquisition as it could not agree with the current owners on the commercial terms

5. Cotton business recovered (industrial segment margins up 24% y-y) but wood business continues to be under pressure.

6. On Gabon, management updated that Olam has started the dredging process but it admitted that there will be cost overruns on the project. Management expects the Gabon Urea project to commence operations in FY17; there is no change in Tata Chemicals’ involvement in the project.

7. Edible nuts volume grew strongly (~12.5%), mostly because of the new business in Turkey and large peanuts crop in the US. Processing and almond plantations led to higher margins.

8. Confectionary volumes declined as shipments were delayed in coffee and cocoa; Olam expects the volumes to even out in the coming quarters.

9. Food staples volume continues to jump as Olam moves to more grains (which is inherently a higher volume low margin business).

10. The dairy business continues to struggle with both Rusmolco and NZFSU behind plan, and the CFS business has lost some money during the quarter.

11. Update on Muddy Waters: As per management, Olam has been trying to serve notices to Carson Block/Muddy Waters, but it has not been successful in doing that. We believe that Olam may give up chasing them.

12. Liquidity profile: As in Dec 2012, Olam has cash of ~SGD1.1bn, readily marketable inventory of SGD4.05bn, secured receivables worth SGD1.32bn and bank lines of SGD4.4bn which is equivalent to SGD10.9bn of available liquidity. Olam also has long-term facility of SGD3.22bn, amounting to a total facility of SGD13.27bn. Out of its total facilities, SGD8.1 is short-term, SGD1.95bn is medium term and remaining is long term.