Olam International

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SINGAPORE
MITA No. 013/06/2008

Company Report

12 March 2009

Olam International Ltd
Gravity-defying growth
Resilient to recession. Olam International Ltd (Olam) has been delivering consistent revenue and earnings growth since its listing in 2005, and growth momentum is expected to sustain despite the global recession. Management has guided for 16% to 20% topline CAGR and 25% to 30% earnings CAGR over the next three years. These goals are achievable, given that demand for food is relatively inelastic and earnings are therefore less vulnerable to the global economic downturn. Olam has already proven its resilience by delivering a 32.9% growth in 1H09 core earnings despite the recent collapse of commodity prices, demonstrating its ability to perform under difficult conditions. Growth opportunities abound. The global economic turmoil has presented Olam with organic and inorganic growth opportunities. The group has been expanding its market share at the expense of weaker competitors who have been ousted as a result of the credit crunch and economic downturn. At the same time, distressed assets have emerged following the financial meltdown, presenting the group with M&A opportunities. Management has articulated its interest to pursue bite-sized acquisitions, but remains cautious to contain its gearing levels. But gearing is relatively high. Olam's key weakness, in our view, is its high gearing ratio. It is more heavily geared than its peers, with total debt to equity ratio of 4.67x, substantially higher than its peers, whose gearing ratios range from 0.48x to 1.38x. Even after adjusting for its hedged inventories and receivables, gearing remains above that of its peers'. The group's reliance on debt could pose refinancing risks in the event of a protracted credit crunch. Rising interest costs could also erode profit margins should the group find itself unable to pass on these higher costs to its customers. Valuations near historical trough; initiate with BUY. The equity market meltdown has brought Olam down to its trough valuations. We see value is emerging at current levels although the volatility could persist in the near term. Olam's key investment merit lies in its resilient earnings growth profile against a climate of earnings contraction. We initiate coverage on the stock with a BUY rating and S$1.37 fair value estimate based on 10x FY10 PER. Key risks include high gearing, counter-party risk, and dilution risk from its convertible bonds. Net Profit (S$m) 109.0 150.8 185.7 235.1 EPS (cents) 6.7 10.1 10.8 13.7 EPS Growth (%) 20.8 49.6 7.5 26.6 PER (x) 17.7 11.8 11.0 8.7 Div Yield (%) 2.9 2.1 3.5 2.9

Initiating Coverage

BUY
S$1.19
Fair Value:
Stock Code: Reuters: ISIN Code Bloomberg: Event:

S$1.37
OLAM.SI O32 OLAM SP Initiate Coverage

General Data Issued Capital (m) Major Shareholder Kewalram Singapore Ltd Free Float (%) NAV per share (S cents) Daily Vol 3-mth (‘000) 52Wk High (S$) 52Wk Low (S$) (24.28%) 69.5% 48.1 10,717 3.190 0.835 1,713 Mkt Cap (S$m/US$m) 2,039/1,334

Lee Wen Ching (65) 6531 9806 e-mail: wenching@ocbc-research.com

Year to 30 Jun FY 07 FY 08 FY 09F FY 10F

Turnover (S$m) 5,455.5 8,111.9 9,186.0 9,942.3

EBIT (S$m) 273.6 366.5 566.9 505.7

Please refer to the important disclosures at the back of this document.

Olam International Ltd

Table of Content
Page Section A Section B Section C Section D Section E Section F Section G Investment Highlights SWOT Analysis Porter's Five Forces Overview of Recent Performance Business Segments Peers Comparison and Valuation Disclaimer 3 6 12 15 17 21 25

Page 2

12 March 2009

Olam International Ltd

Section A: Investment Highlights
Olam is a global integrated supply chain manager of agricultural products and food ingredients. It focuses on four types agricultural commodities: (i) edible nuts, spices and beans, (ii) confectionary and beverage ingredients, (iii) food staples and packaged foods, and (iv) fibre and wood...
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