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Saturday, 3 September 2011

Olam's US$1b profit target realistic?

Several analysts offer differing views on the giant commodity player's ambitious 2016 goal. By Mindy Tan


COMMODITY player Olam International earlier this week unveiled ambitious new targets - notably, to double its previous goal to US$1 billion profit after tax (PAT) by FY2016.

Olam, which said it would undertake 65 initiatives over 2011- 2016 to achieve its PAT target, has been quick to put its plan in motion.

During the FY2011 full-year results briefing on Monday, Olam - in which Temasek Holdings is a major shareholder - said it was on track to hit its previous target of US$454 million at least two years ahead of schedule.

In a report released on Wednesday, Royal Bank of Scotland (RBS) analyst John Rachmat was the most bullish on Olam, maintaining a 'buy' recommendation, with a target price of $3.80.

'Olam has now demonstrated its ability to grow its earning in both up- and down-cycles in the commodity space. Its sales volume has grown 22 per cent compound annual growth rate (CAGR) over the 2005-11 period and its PAT has grown 37 per cent CAGR over the same period,' he said. 'In my opinion, it is very likely they will deliver on their PAT target. Of course, all this depends on commodity price swings between now and 2016.'

CIMB analyst Lee Wen Ching, however, disagrees. 'We think Olam's US$1 billion target appears slightly aggressive on a core net profit basis (stripping fair value gains on biological assets and negative goodwill), as that would imply a higher CAGR between FY11 and FY16 as compared to what it has achieved so far since listing,' she said.

'Furthermore, it is now growing from a higher base, implying that absolute growth will have to be much stronger to achieve that target.'

Separately, an analyst who declined to be named noted that Olam's PAT target is based on the assumption of potential mergers and acquisitions.

However, given that their palm oil and Gabon urea investments constitute a significant portion of their capital spending, their M&A pipeline might be less intensive than in the last few years. As such, while still positive on Olam's growth, he is less bullish than before.

The group, which said it would undertake 65 initiatives over the next five years to achieve its PAT target, has been quick to put its plan in motion. On Wednesday, Olam announced the acquisition of an India-based 3,500 tonnes crush per day (TCD) sugar milling facility and a 20MW cogeneration facility by way of Hemarus Industries, with plans to enhance the sugar milling capacity to 5,000 TCD.

Following its FY11 full-year results briefing, Olam's shares surged more than 11 per cent on Wednesday. Yesterday, Olam's shares, which have been in the top 20 volume list since Wednesday, saw 9.6 million shares change hands. The stock hit a high of $2.51 in morning trading, before slumping to $2.40. Olam closed eight cents down at $2.41 yesterday.

Commenting on the stock price movement, CIMB's Ms Lee said: 'We believe the stock surged on the first day on strong headline numbers. However, excluding non-core gains, core net profit of $302 million was below both ours and consensus expectations.'

On Monday, Olam posted a 38 per cent gain in fourth quarter net profit to $127.4 million, and revenue of $4.62 billion - a 46 per cent surge from the same period last year

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