SINGAPORE (March 1): DBS Vickers Securities is maintaining its “hold” call on Olam International while lifting its target price to $2.12 from $1.94 previously.
The supply chain manager and processor of agricultural products and food ingredients on Wednesday reported 4Q earnings of $102.2 million, a reversal from its loss of $269.4 million in the previous year. However, its core profit of $70.8 million still came in below the research house’s expectations on higher taxes.
(See also: Olam swings back to profitability in 4Q on better operational performance)
In a Wednesday report, analyst Mervyn Song notes that Olam investors are still “waiting on the sidelines” even as the group appears to have successfully integrated its US$1.2 billion acquisition of Archer Daniels Midland Co’s (ADM) cocoa business as it has yet to show consistent delivery of positive free cash flow and earnings growth.
(See also: EU okays acquisition of ADM cocoa business by Olam)
“Given Olam’s small free float of c.20% and high gearing relative to other listed companies in Singapore, we believe the majority of investors may continue to shun the stock in the near term,” he adds.
Song explains that a re-rating beyond the stock’s average PE multiple of 16x is unlikely at this stage as he believes Olam’s share price is likely to trade range-bound in the near term, although the risk of a significant fall in its share price is mitigated with Olam periodically conducting share buybacks.
While DBS remains cautions on the stock’s share price performance in the near term, Song highlights significant upside over the medium term should the group successfully execute its plans, for instance to generate additional earnings from the maturity of its $5.1 billion worth of immature assets.
Such a gain would be in addition to earnings from new investment opportunities which the group is due to undertake with its new partner, Mitsubishi Corporation, which recently acquired a 20% interest in the group.
“All these factors may enable Olam’s share price to re-rate closer to $2.23 and $2.75, price levels at which Temasek and Mitsubishi acquired their most recent equity interests in Olam respectively,” says the analyst, who also believes the group will continue to benefit from lower credit spreads in the near term due to Temasek’s majority ownership.
As at 1.23pm, shares of Olam are trading flat at $2.05.
