Olam's Hold call to stay; 12-month target price lowered to $2.55: DBS Vickers

Stock Name: Olam
Company Name: OLAM INTERNATIONAL LIMITED

Research House: DBS Vickers

Price Call: HOLD

Target Price: 2.55

DBS Vickers is maintaining its Hold call on Olam International and lowering its 12-month price target to $2.55 from $3.00 as the brokerage sees a “limited 9% upside” to revised 12-month target price of $2.55.

But it sees an additional upside of $0.47 per share if Olam’s Gabon project achieves financial close in 1QCY12.

The brokerage says Olam is fairly priced in a robust medium term outlook. The stock currently trades at FY12 PE of 13.7x with three-year earnings CAGR of 13.9% (excluding biological assets gains).

But DBS Vickers lowered its FY12-14F EPS by 3-5% to account for higher operating expenses and borrowing costs, which should still more than offset upgrades in net contribution from all segments. So, its core net profit (ex BA gains) should grow by 28% in FY12F, 6% in FY13F and 9% in FY14F, it adds.

For FY11, Olam’s core profit of $302 million was below DBS Vickers’ forecast of $331 million and consensus expectations of $340.5 million. This represented 39% y-o-y growth, driven by 21% lift in volumes and increase in group NC/MT (Net Contribution/tonne) from $129 to $145, partly weighed down by 25% higher operating expenses and 51% jump in borrowing costs.

All segments delivered strong volume growth with Food Staples up 28% y-o-y, Confectionary and Beverage up 15%, Edible Nuts up 15% and Industrial Raw Materials up 13%. Group NC/MT improved due to better business mix, with greater contribution from Edible Nuts at $233/MT (now 24% of NC vs 23% in FY10) and Confectionary and Beverage at $212/MT (26% of NC vs 25%).