SINGAPORE (May 17): DBS Vickers Securities is keeping its “hold” call on Olam International with a higher target price of $2.15 compared to $2.12 previously.
This is in contrary to consensus “sell” ratings, which the research house believes is unwarranted.
(See also: Olam reports 26.6% higher 1Q earnings of $143.9 mil on improved operational performance)
“While Olam faces the challenges of declining cocoa prices and softer cocoa processing margins this year and still generates suboptimal returns, we believe the company should deliver decent earnings per share (EPS) growth this year, given strong performance from Edible Nuts and recovery at its Food Staples division,” explains analyst Mervin Song in a Tuesday report.
While Song believes the stock will remain range-bound for now and that a re-rating is unlikely at this stage, the analyst highlights significant medium- and long-term upside given the group’s $5.1 billion worth of immature assets – which, on maturity, could generate an additional $760 million to $1.26 billion of EBITDA.
“All these factors may enable Olam’s share price to re-rate closer to $2.23 and $2.75 in the medium term, price levels at which Temasek and Mitsubishi acquired their most recent equity interests in Olam respectively,” says the analyst.
The group has also successfully integrated its US$1.2 billion acquisition of ADM Cocoa and is hence on track to achieve positive free cash flow to firm/equity by the year end, in his view.
(See also: Olam to generate positive free cash flow this year)
One key risk to DBS’ neutral stance on the stock is a faster-than-expected delivery of earnings from the group’s gestating and immature assets.
On the downside, Song cautions that Olam’s gearing in excess of 1.5 times makes its earnings vulnerable to a significant rise in interest rates.
As at 10.42am, shares of Olam are trading 1 cent higher at $2.01.
