Singapore Company Guide Olam International Version 6 | Bloomberg: OLAM SP | Reuters: OLAM.SI Refer to important disclosures at the end of this report DBS Group Research . Equity 16 May 2017 HOLD Holding tight Last Traded Price ( 15 May 2017): S$1.99 (STI : 3,264.21) Limited upside for now. We maintain our HOLD call on Olam Price Target 12-mth: S$2.15 (8% upside) (Prev S$2.12) International (Olam) with a revised TP of S$2.15. Olam appears to have successfully integrated the US$1.2bn acquisition of ADM Analyst Cocoa, and is on track to achieve positive free cash flow to Mervin SONG CFA +65 6682 3715 [email protected] firm/equity by the year end. However, with limited upside to our TP, we believe the stock will remain range bound. In addition, with return on equity (ROE) still suboptimal, a re-rating beyond its What’s New average PE multiple of 16x implied by our TP is unlikely at this 1Q17 core profit up 4% y-o-y, in line with stage. expectations Where we differ – Sell calls unwarranted. Consensus has sell Strong contribution from Edible Nuts and Food ratings on Olam, which we believe is unwarranted. While Olam Staples divisions faces the challenges of declining cocoa prices and softer cocoa processing margins this year and still generates suboptimal Positive free cashflow stronger in 1Q17, on track returns, we believe the company should deliver decent EPS to achieve positive free cashflow to equity by year growth this year, given strong performance from Edible Nuts and end recovery at its Food Staples division. Significant medium term upside. Despite our cautious stance on Olam’s near term share price performance, we remain positive on Price Relative Olam’s long term outlook. Currently, Olam has S$5.1bn worth of immature assets which on maturity, could generate an additional c.S$0.76bn-1.26bn of EBITDA. All these factors may enable Olam’s share price to re-rate closer to S$2.23 and S$2.75 in the medium term, price levels at which Temasek and Mitsubishi acquired their most recent equity interests in Olam respectively. Valuation: On the back of higher profits from the redemption of its 7% Forecasts and Valuation perpetual securities, we raised our TP to S$2.15 from S$2.12. Our FY Dec (S$ m) 2015A 2016A 2017F 2018F TP is a blend of our PE valuation of S$2.16 and our DCF valuation Revenue 19,053 20,587 21,120 21,522 EBITDA 1,137 1,189 1,304 1,392 of S$2.15. Pre-tax Profit (34.2) 433 475 595 Net Profit (123) 318 338 446 Key Risks to Our View: Net Pft (Pre Ex.) 339 316 367 463 The key risk to our neutral stance is a faster than expected delivery Net Pft Gth (Pre-ex) (%) 17.0 (6.7) 16.2 26.0 of earnings from Olam’s gestating/immature assets. On the EPS (S cts) (4.7) 11.5 12.2 14.0 downside, with gearing in excess of 1.5x, Olam’s earnings are EPS Pre Ex. (S cts) 13.0 11.5 13.2 14.5 EPS Gth Pre Ex (%) 9 (12) 15 10 vulnerable to a significant rise in interest rates. Diluted EPS (S cts) (4.2) 9.76 10.4 13.7 Net DPS (S cts) 6.00 6.00 6.00 6.00 At A Glance BV Per Share (S cts) 175 164 170 203 Issued Capital (m shrs) 2,731 PE (X) nm 17.2 16.3 14.2 Mkt. Cap (S$m/US$m) 5,434 / 3,870 PE Pre Ex. (X) 15.3 17.3 15.0 13.7 Major Shareholders (%) P/Cash Flow (X) nm 8.8 6.6 6.4 Temasek Capital 52.2 EV/EBITDA (X) 13.9 15.3 13.9 13.0 Mitsubishi Corporation 20.0 Net Div Yield (%) 3.0 3.0 3.0 3.0 P/Book Value (X) 1.1 1.2 1.2 1.0 Orbis Group 7.8 Net Debt/Equity (X) 1.9 2.0 2.1 1.7 Free Float (%) 20.0 ROAE (%) 7.3 6.0 6.8 7.9 3m Avg. Daily Val (US$m) 1.3 Earnin gs Rev (%): 2 4 ICB Industry : Consumer Goods / Food Producers Consensus EPS (S cts): 13.5 14.0 Other Broker Recs: B: 0 S: 1 H: 1 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:YN, PY Company Guide Olam International WHAT’S NEW Solid start to the year 1Q17 results in line with expectations with better free cash EBITDA for the Industrial Raw Materials segment flows was down marginally by 5% y-o-y due to sluggish 1Q17 core profit (excluding exceptional, biological demand for wood products in India. losses and after perpetual dividends) rose 4% y-o-y to S$132.7m which was in line with expectations. Gearing stable The growth in core profit was largely attributed to Gearing as measured by net debt (excluding readily increased contribution from the Edible Nuts and marketable inventories)/equity was stable at 99.4% Food Staples divisions, partially offset by higher (99.7% in 4Q16 and 99.9% in 1Q16). interest costs and coupon payments post the Olam remains in a strong liquidity position, with issuance of additional perpetual securities in 2H16. S$7.8bn of unutilised bank lines, readily marketable Meanwhile, Olam continues to make good progress inventories of S$5.8bn and cash of S$2.6bn. This is on the cash flow front. It generated positive free sufficient to cover its short term debt of c. S$5.6bn. cash flow to firm (FCFF) of S$135m, an improvement from –S$156m in 1Q16. In addition, Redemption of 7% perpetual securities free cash flow to equity (FCFE) improved to –S$42m Olam announced in 1Q17 that plans to redeem its versus –S$284m in 1Q16. Olam appears to be on relatively expensive 7% perpetual securities on 1 track to achieve its target of positive FCFE by year September 2017. After incorporating the buyback of end. these securities, we raised our FY17-18F core profit by 2-4%. Strong contribution from Edible Nuts and Food Staples On the back of higher profits, we also raised our TP The Edible Nuts segment had a strong start to the to S$2.15 from S$2.12. Our TP is a blend of our PE year with EBITDA rising 72% y-o-y to S$138m. This valuation of S$2.16 and our DCF valuation of was underpinned by 23% y-o-y growth in volumes. S$2.15 Our PE valuation remains pegged to Olam’s In addition, the segment benefited from the average PE multiple which now stands at c.16.3x. acquisition of Brooks Peanuts, recovery in Almond prices and better margins in the cashew business. Maintain HOLD The Food Staples division also had a strong quarter, With limited upside to our revised TP of S$2.15, we with segment EBITDA rising 38% y-o-y to S$118m. maintain our HOLD recommendation. The improved performance was driven by growth in grains trading volumes, better wheat milling operations in West Africa and reduced loses at the dairy farming operations in Uruguay. Meanwhile, the Confectionary & Beverage segment had soft quarter as expected with EBITDA falling by 29% y-o-y. This was largely due to softer performance from the cocoa supply chain business as most of the cocoa origination volumes are now used for Olam’s in-house processing business. Meanwhile, cocoa processing margins compressed from the high levels achieved last year. ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Olam International Quarterly / Interim Income Statement (S$m) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq Revenue 4,761 6,106 5,804 21.9 (4.9) Cost of Goods Sold (4,155) (5,510) (5,208) 25.3 (5.5) Gross Profit 606 596 596 (1.7) 0.0 Other Oper. (Exp)/Inc (348) (384) (287) (17.5) (25.2) Operating Profit 258 213 309 19.7 45.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc (0.6) 12.0 3.02 nm (74.8) Net Interest (Exp)/Inc (99.4) (112) (140) (40.4) (24.6) Exceptional Gain/(Loss) (17.8) 17.7 (2.0) 88.9 nm Pre-tax Profit 140 130 170 21.4 30.9 Tax (31.0) (27.1) (34.0) 9.6 25.4 Minority Interest 4.23 (0.9) 7.36 74.0 nm Net Profit 109 88.5 131 19.5 47.7 Net profit bef Except. 127 70.8 133 4.3 87.5 EBITDA 338 331 401 18.5 21.0 Margins (%) Gross Margins 12.7 9.8 10.3 Opg Profit Margins 5.4 3.5 5.3 Net Profit Margins 2.3 1.4 2.3 Source of all data: Company, DBS Bank Free cash flow 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Operating Cash flow (before interest & tax) 372.1 282.4 195.3 301.0 345.4 315.9 203.8 378.4 401.8 Changes in working capital (162.7) (112.3) (252.4) (468.5) (35.5) 165.5 (182.5) (175.2) (74.7) Cashflow from operations 209.4 170.1 (57.1) (167.5) 309.9 481.4 21.3 203.2 327.1 Tax paid (10.2) (25.7) (17.2) (74.7) (21.6) (23.1) (17.1) 13.4 (7.0) Capex/Investments (79.0) (129.5) (55.0) (1,826.2) (444.3) (111.1) (345.9) (484.2) (185.2) Free Cash Flow to Firm (FCFF) 120.2 14.9 (129.3) (2,068.4) (156.0) 347.2 (341.7) (267.6) 134.9 Net interest Paid (177.6) (72.5) (112.2) (116.1) (127.8) (68.4) (119.5) (32.0) (176.4) Free Cash Flow to Equity (FCFE) (57.4) (57.6) (241.5) (2,184.5) (283.8) 278.8 (461.2) (299.6) (41.5) Source: Olam, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 3 Company Guide Olam International 1Q17 Segmental performance 1Q16 4Q16 1Q17 % Chg % Chg Volumes ('000 MT) YoY QoQ Nuts, Spices & Beans 300.4 421.1 370.2 23.2 -12.1 Confectionary & Beverage 533.1 379.5 506.2 -5.0 33.4 Food Staples & Packaged Foods 1,792.4 3,035.1 3,146.6 75.6 3.7 Industrial Raw Materials 339.7 374.6 438.7 29.1 17.1 Total 2,965.6 4,210.3 4,461.7 50.4 6.0 % Chg % Chg Revenues (S$m) 1Q16 4Q16 1Q17 YoY QoQ Nuts, Spices & Beans 766.8 1,224.1 911.3 18.8 -25.6 Confectionary & Beverage 2,250.7 2,217.8 2,089.3 -7.2 -5.8 Food Staples & Packaged Foods 1,201.4 2,028.2 1,975.7 64.4 -2.6 Industrial Raw Materials 542.6 636.1 827.7 52.5 30.1 Commodity Financial Services 0.0 0.0 0.0 NM NM Total 4,761.5 6,106.2 5,804.0 21.9 -4.9 % Chg % Chg EBITDA (S$m) 1Q16 4Q16 1Q17 YoY QoQ Nuts, Spices & Beans 80.2 87.6 138.0 72.1 57.5 Confectionary & Beverage 105.2 141.2 75.0 -28.7 -46.9 Food Staples & Packaged Foods 85.7 104.6 118.3 38.0 13.1 Industrial Raw Materials 65.2 18.1 62.2 -4.6 243.6 Commodity Financial Services (3.5) (2.6) 5.1 NM NM Total 332.8 348.9 398.6 19.8 14.2 % Chg % Chg EBITDA/MT (S$m) 1Q16 4Q16 1Q17 YoY QoQ Nuts, Spices & Beans 267 208 373 39.6 79.2 Confectionary & Beverage 197 372 148 -24.9 -60.2 Food Staples & Packaged Foods 48 34 38 -21.4 9.1 Industrial Raw Materials 192 48 142 -26.1 193.4 Source: Olam, DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 4 Company Guide Olam International Edible nuts EBITDA/MT CRITICAL DATA POINTS TO WATCH Critical Factors Maturing of gestating or partially contributing assets.