Olam International - Maintain HOLD with lower S$1.86 FV


• 3Q below expectation

• Near-term outlook remains muted

Pare FV from S$1.88 to S$1.86

Weaker 3Q15 showing
Olam’s 3Q15 revenue was up 4% YoY at S$4471.5m, with all segments registering growth except its Food Staples & Packaged Foods segment, which faced lower volumes, prices and continued underperformance of its upstream Dairy operations. And because of this, EBITDA slipped 18% to S$184.0m, while reported net profit tumbled 30% to S$31.0m; operational NPAT rose 6% to S$34.2m. 9M15 revenue though dipped 9% to S$13,604.2m, meeting 65% of our full-year forecast, while reported net profit tumbled 67% to S$157.0m. However, Olam noted that operational NPAT jumped 41% to S$258.0m, meeting about 65% of our FY15 estimate.

Dairy operations continued to underperform
One of the biggest drags came from the Food Staples & Packaged Foods segment, where EBITDA margin nearly halved to 2.3% from 4.9% in 3Q14 (4.6% in 2Q15), due to reduced trading volumes and as Dairy operations continued to underperform. But Olam is restructuring the dairy farming business in Uruguay and it expects to book a one-time restructuring cost in 4Q15. Meanwhile, the Industrial Raw Materials segment continued to see lower volumes, mainly due to lower Fertilizer trading, cotton and wood Products volumes; while the SEZ business continues to be a drag on EBITDA.

Remains upbeat about Mitsubishi JV
Outlook for commodities is likely to remain a mixed bag, and while prices are mostly lower, management notes that it is due to higher supply, and not because of lower demand, especially for food-related commodities. In any case, Olam will continue to optimize the shape of its portfolio and reduce complexity, thus bringing a sharper focus to the business and reduce operating costs. Separately, management remains upbeat about its JV with Mitsubishi to import and market an agreed list of products (e.g. coffee, sesame, edible nuts etc) into Japan. Olam also sees opportunities for both of them to collaborate in mutually beneficial business opportunities.

Technical Analysis
Daily Chart
Maintain HOLD with S$1.86 fair value
While we think that the collaboration is a medium-term positive, the near-term bearish commodities outlook is likely to weigh on sentiment. Note that we are also paring our earnings estimates for FY15 by 19% and FY16 by 12%. This in turn drops our fair value from S$1.88 to S$1.86 even as we push our 10x valuation peg from blended FY15/FY16 to FY16F EPS. Maintain HOLD. (Read Report)

Read Related Report
1) Olam International - Waiting for fulfillment of promises by DBS Group Research, published on 16 November 2015

Source : OCBC Investment Research

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