Olam - Olam's 2Q profit drops on dairy asset value

Stock Name: Olam
Company Name: OLAM INTERNATIONAL LIMITED
Research House: Deutsche Bank

Olam International, which supplies commodities from coffee to corn, said second-quarter profit fell 8% following a goodwill charge on its dairy farms purchase.

Net income fell to $145.4 million from $158.9 million in the three months ending Dec. 31, Singapore-based Olam said today in a statement to the local stock exchange. Revenue gained 45% to $4.12 billion.

A non-recurring $33.6 million negative goodwill charge in December on the purchase of New Zealand Farming Systems Uruguay pared Olam’s surge in earnings from commodity sales. Excluding the charge, income rose 66% as Olam boosted the volume of commodities it sold by 16% to 3.9 million tonnes in the six months to Dec 31.

“Olam’s current valuation appears undemanding” at 16 times this year’s earnings per share, Eltricia Foong, an analyst with Deutsche Bank in Kuala Lumpa, said in a Feb 11 note to investors. “Its integrated value chain should provide plenty of opportunities to broaden the customer base and product range within the agricultural sector.”

Deutsche Bank AG on Feb 11 upgraded Olam to a “buy” from a “hold” and raise its 12-month price target for its stock to $3.60. The shares gained 0.7% to $3.04 at the close of trade today in Singapore. The results were announced after the market closed.

Floods, Drought
Floods in Pakistan, droughts in Russia, and political tensions in Africa among other events curbed global commodity supplies, raising prices to a point where the United Nations warned of the potential for a repeat of the 2008 food crisis.

The basket of Olam’s commodities, including rice, sugar, cocoa and cotton, jumped 44% in value in the period July 1, 2010 to Feb 10, the company said today in a presentation on its website. The Standard & Poor’s GSCI Agriculture Index of eight futures has jumped 77% in the same period, Olam said.

Olam, backed by Temasek Holdings, in August had to raise its offer for NZ Farming Systems by 27% to gain control of the company, which owns dairy farms in South America. Olam paid NZ$101.8 million ($98.6 million) for almost 60% of shares and raised its stake to 78% by September.

Olam will continue to invest “selectively” in plantations and processing facilities to boost margins, Chief Executive Officer Sunny Verghese said in the presentation.