Olam underperforms with a meager 29% rise in profits in FY14: OCBC

The company could have harvested millions more.

Difficulties with the mechanized cashew nut operations and higher coffee and cocoa prices held back Olam from achieving analyst forecasts as it earned $329m, $72m short of OCBC’s $401m estimate, and $34m short of the consensus forecast.

In a report, OCBC revealed that stripping out biological gains and exceptional items, Olam reported core FY14 PATMI of S$329m (+29% y-o-y).

The weaker than expected results were mainly driven by lower volumes (-7% y-o-y) as the group reduced its grain trading activities and it encountered difficulties with its mechanized cashew nut operations.

Margins were also lower due to the underperformance of its dairy operations, causing EBITDA/MT for the packaged foods business to drop from S$38.6m to S$33.4m.

If not for the higher coffee (+65% CYTD) and cocoa prices (+22% CYTD), which caused a spike in working capital, Olam would have achieved its target of generating positive Free Cash Flow to Firm (FCFF) by end Jun14.

Here’s more from OCBC:

Despite the weaker than expected results, there was overall improvement in Olam’s operations (FY14 core PATMI up 29% y-o-y) and financials. FY14 net debt/equity fell to 1.8x from 1.9x in the prior year, this is below Olam’s gearing target of below 2x by end FY16.

Furthermore, Olam is on track to achieve its target of releasing S$1.5bn in cash through various initiatives such as sale/leaseback, JV and asset disposals. To date, it has realized S$917m or 61% of its target (see table below), with c.S$475m to be received in FY15.

FY15. After factoring in lower volumes, we reduce our FY15-17F core profit by 15-17%. Nevertheless, as its gestating and partly contributing assets approach full maturity, we expect Olam’ earnings to rise 24% p.a. over the next three years. In addition, with S$475mproceeds from recent divestments and active working capital management, Olam should be positive FCFF by end FY15. These catalysts, we believe, will continue to re-rate Olam.