Olam's profitability per ton dropping by double-digits

One segment is down by around 40%.

Despite rising revenues across the board, research firm OCBC has flagged the plunging profitability among the company's segments.

The Food Staples and Packaged Foods segmen, for example, has seen its GC/ton down 17% and NC/ton down 12%. Worse still, the Confectionery & Beverage Ingredients has witnessed GC/ton falling 41% and NC/ton down 42%.

Here's more from OCBC:

FY13 results just in line. Olam International Limited (Olam) posted FY14 revenue of S$20.8b, up 22%, and was around 5% ahead of our forecast, as it continued to enjoy strong volume growth (+49.5%). However, reported net profit slipped 2% to S$362.6m, hit by higher taxation. Besides higher taxation (in line with our forecast), we also note that margins have fallen across some business segments, core earnings came in much lower at S$314.3m, but still up 13%, and was about 3% ahead of our estimate. Olam declared a final dividend of S$0.04/share, unchanged from last year.

Profitability/ton appears to be lower. Business-wise, the Food Staples and Packaged Foods segment contributed 36% of total 4QFY13 revenue, as revenue jumped 53% YoY, volume +29%; but we note that profitability has slipped, with GC/ton down 17% and NC/ton down 12%. Confectionery & Beverage Ingredients was next with 24% contribution in 4Q, where revenue climbed 22% YoY, volume +23%; but again we note lower profitability, with GC/ton falling 41% and NC/ton down 42%. Industrial Raw Materials contributed 22% of 4Q13 revenue, but sales slipped 4% YoY, even as volume +30%; GC/ton was flat, but NC/ton rose 19%.

Net gearing back at 2.0x. Meanwhile, net gearing has eased somewhat from 2.2x as of end Mar to around 2.0x as of end Jun, and is back to the same level as last Jun. Olam believes that it has made progress on its strategic plan priorities and pathways identified include taking a rebalanced approach to growth and cash-flow generation (aims to be FCF positive by FY14).

Lower S$1.45 fair value. In view of the eroding profitability, we pare our FY14F core net profit figure by 16% (but still expect to see decent earnings growth in FY15). This also drops our fair value from S$1.73 to S$1.45, still based on 10x FY14F EPS. Maintain HOLD.