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Olam International Singapore Company Guide Olam International Version 7 | Bloomberg: OLAM SP | Reuters: OLAM.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 1 Mar 2018 HOLD Positives priced in for now Last Traded Price ( 28 Feb 2018): S$2.25 (STI : 3,517.94) Limited upside for now. We maintain our HOLD call on Olam Price Target 12-mth: S$2.31 (3% upside) (Prev S$2.15) International (Olam) with a revised TP of S$2.31. Olam appears Analyst to have successfully integrated the US$1.2bn acquisition of Mervin SONG, CFA +65 6682 3715 [email protected] ADM Cocoa, and has achieved its target of positive free cash flow to firm/equity by end FY17. However, with limited upside to our TP, we believe the stock will remain range bound. In What’s New addition, with return on equity (ROE) still suboptimal, a re-rating • FY17 core profit up 23% y-o-y - above expectations beyond its average PE multiple of 16x implied by our TP is • Better than expected performance from edible nuts unlikely at this stage. • Achieves target of positive free cashflow to firm and Where we differ – Sell calls unwarranted. Consensus has sell equity ratings on Olam, which we believe is unwarranted. While Olam • Rewards shareholders with higher FY17 DPS of 7.5 Scts, still generates suboptimal returns, we believe the company up from 6.0 Scts in FY16 should deliver healthy 8% EPS growth in 2018, given continued maturity of the upstream assets, growth of in its Edible Nuts and recovery at its Confectionary & Beverage division. In Price Relative addition, Olam has also delivered on its target of delivering S$ Relative Index positive free cashflows. 2.8 203 2.6 183 2.4 163 2.2 Significant medium-term upside. Despite our cautious stance on 2.0 143 1.8 123 Olam’s near-term share price performance, we remain positive 1.6 103 1.4 83 on Olam’s long-term outlook. Currently, Olam has S$3.9bn Feb-14 Feb-15 Feb-16 Feb-17 Feb-18 worth of immature assets which on maturity, could generate an Olam International (LHS) Relative STI (RHS) additional c.S$0.3bn-0.4bn in EBITDA. All these factors may Forecasts and Valuation allow Olam’s share price to re-rate closer to S$2.75 in the FY Dec (S$ m) 2016A 2017A 2018F 2019F medium term, price levels at which Mitsubishi acquired its most Revenue 20,587 26,273 27,416 26,445 recent equity interest in Olam. EBITDA 1,189 1,343 1,481 1,539 Pre-tax Profit 433 631 593 652 Net Profit 318 524 475 515 Valuation: Net Pft (Pre Ex.) 316 390 490 528 On the back of better than expected FY17, we raised our TP to Net Pft Gth (Pre-ex) (%) (6.7) 23.4 25.6 7.8 S$2.31 from S$2.15. Our TP is a blend of our PE valuation of EPS (S cts) 11.5 18.6 14.5 15.8 EPS Pre Ex. (S cts) 11.5 13.9 15.0 16.2 S$2.41 and our DCF valuation of S$2.20. EPS Gth Pre Ex (%) (12) 21 8 8 Diluted EPS (S cts) 9.76 16.0 14.5 15.7 Key Risks to Our View: Net DPS (S cts) 7.50 7.50 7.50 7.50 The key risk to our neutral stance is a faster than expected BV Per Share (S cts) 164 192 174 183 PE (X) 19.5 12.1 15.5 14.3 delivery of earnings from Olam’s gestating/immature assets PE Pre Ex. (X) 19.6 16.2 15.0 13.9 and deployment of over c.S$600m from the conversion of P/Cash Flow (X) 10.0 3.8 13.5 9.1 outstanding equity warrants. EV/EBITDA (X) 15.9 12.8 12.4 11.9 Net Div Yield (%) 3.3 3.3 3.3 3.3 P/Book Value (X) 1.4 1.2 1.3 1.2 At A Glance Net Debt/Equity (X) 2.0 1.5 1.4 1.4 Issued Capital (m shrs) 3,171 ROAE (%) 6.0 6.6 7.4 7.7 Mkt. Cap (S$m/US$m) 7,136 / 5,388 Earnings Rev (%): 6 15 Major Shareholders (%) Consensus EPS (S cts): 14.0 14.0 Temasek Holdings Pte Ltd 53.8 Other Broker Recs: B: 0 S: 1 H: 1 Mitsubishi Corporation 17.5 Source of all data on this page: Company, DBS Bank, Kewalram Singapore Ltd 7.1 Bloomberg Finance L.P Free Float (%) 14.6 3m Avg. Daily Val (US$m) 2.1 ICB Industry : Consumer Goods / Food Producers ed: JS / sa:AS, PY, CS Company Guide Olam International WHAT’S NEW Delivers on free cash flow targets FY17 results above expectations • However, the confectionery & beverage ingredients segment had a weak year with EBITDA down 20% y-o-y • 4Q17 core profit (excluding exceptional, biological losses to S$328m. Despite volumes increasing by 22% y-o-y, and after perpetual dividends) jumped 55% y-o-y to margins were under pressure due to tougher market S$109.9m taking FY17 core profit to S$446.8m (+23%). conditions in the coffee business. This was partially offset • This was above expectations largely due to higher by better performance of the cocoa business as the contribution from the edible nuts segment as we had processing business benefited from firm combined cocoa under estimated the margins for the business. ratios. • Underpinning the robust 4Q17 and FY17 profitability was the 85% and 56% increase in volumes on account of Fall in gearing due to conversion of warrants greater oil seeds and rice trading despite the difficulties experienced in the coffee business. • On the back of conversion of outstanding warrants into • Pleasingly, Olam also delivered on its stated target of shares worth c.S$585m, gearing as measured by net debt generating positive cash flows. For FY17, free cash flow (excluding readily marketable inventories)/equity fell to to firm (FCFF) and free cash flow to equity (FCFE) stood at 76.5% from 99.7% at end 4Q16. Post balance date, of S$1.5bn and S$1.0bn respectively. The positive cash another 50m warrants were converted into equity raising flows were achieved through a reduction in capex, c.S$72m. Given the stronger balance sheet, there is working capital optimisation and lower prices for certain potential for Olam to pursue acquisitions. commodities. • Olam also remains in a strong liquidity position, with • On the back of higher earnings, Olam also lifted its final S$8.5bn of unutilised bank lines, readily marketable dividend to 4.0 Scts, taking dividends for the whole of inventories of S$4.5bn and cash of S$2.0bn. This is FY17 to 7.5 Scts up from 6.0 Scts in FY16. sufficient to cover its short-term debt of c. S$4.7bn. Strong contribution from Edible Nuts and Food Staples Returns still sub-optimal • The Edible Nuts segment had a strong end to the year • Owing primarily to Olam still having a large portion of with 4Q17 EBITDA rising 13% y-o-y to S$99.1m. This gestating or partly contributing assets worth S$0.3bn and translated to FY17 EBITDA of S$438.4m which was S$3.6bn respectively, Olam’s returns as measured by higher than our original S$351m forecast largely due to EBITDA/average invested capita (IC)l is still sub-optimal. higher than expected margins (EBITDA/MT of S$299 • For example, Olam’s gestating and partly contributing versus our forecast of S$254m). The robust esults were assets are only delivering EBITDA/average IC of -0.5% also attributed to strong FY17 volume growth of 7.8% and 2.8% compared to its target of between 15-18%. which came mainly from the cashew, almonds, sesame Likewise, the partially contributing mid/downstream and spices businesses. assets are generating EBITDA/average IC of 9.5% • The healthy FY17 performance was also attributed to a compared to target of between 13-16%. 9% y-o-y jump in EBITDA from the Foods Staples and • Even its fully contribution assets have room to improve Packaged Foods segment. The segment benefited from a with the upstream, supply chain and mid/downstream significant interest in trading volumes from grains which assets achieving an EBITDA/Average IC of 7.8%, 7.3% resulted in FY17 volumes jumping 78% y-o-y. The and 11.1% compared to target of 15-18%, 10-13% and division also posted a recovery in dairy and packaged 13-16%. food business post the stabilisation of the Nigerian Naira. • As Olam sweats its more mature assets and operating • The industrial raw materials division had an excellent conditions normalise in the coffee market as well as its FY17, with EBITDA jumping 46% y-o-y. The significant immature assets such as its rubber and palm plantations improvement was attributed to the commission of new reach full maturity, we believe there remains significant ports and the partial sale of the port concession rights in upside to Olam’s earnings going forward. Gabon in 4Q17. The core cotton business also did well, which contributed to the segment’s FY17 volume jumping 39% y-o-y. Page 2 Company Guide Olam International Positive momentum to flow into 2018 • Consequently, we raised our TP to S$2.31 from S$2.15. Our TP is a blend of our PE valuation of S$2.41 • Going forward, we expect the positive momentum from (previously S$2.16 and pegged to average PE multiple of 2017 to flow into 2018, as Olam benefits from the 16.1x) and our DCF valuation of S$2.20 (previously normalisation of the coffee market as supply increases, S$2.15).
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