Hit by higher tax;
Price Target : 12-Month S$ 1.60 (Prev S$ 1.80)
•FY13 net profit missed our below consensus estimate due to higher tax rate
•Outlook remains challenging with weak commodity prices and macro uncertainties
•Focus is on execution of its “rebalancing strategy”
•Maintain HOLD with a lower TP of S$1.60
FY13 results below. Olam’s FYJune13 core profit missed our/consensus estimates by 19%/23% as taxes were much higher than expected. Excluding the one-off S$12.8m tax on sale of assets, the effective tax rate of 19.1% was also higher than guidance of 12-15%, which management attributes to tax adjustment for underprovided tax in the first few quarters and higher earnings from high tax jurisdiction countries in 4Q. Excluding biological gains of S$96.3m and exceptionals of S$10.3m, net profit was flat y-o-y at S$256m despite 22% growth in revenue. On a positive note, net gearing drifted to below 2x at 1.93x as of end-June. Olam declared a final DPS of 4 Scts.
Focus on “rebalancing strategy”. Operating environment is challenging in view of the macro uncertainties, currency depreciation in emerging markets and weak commodity prices, in particular affecting tomato, peanut, coffee and cocoa products. Management continues to focus on its strategy to rebalance growth and cash flow in the coming year to bring free operating cash flow back to positive territory by end of FY14.
Maintain HOLD; TP lowered to S$1.60. We have trimmed our FY14/15F core profit by 17/5% to factor in higher tax rate of 1.5ppts each year and lower gross profit /tonne of S$10.90/7.40. Olam is trading at inexpensive valuations of 9x FY14F PE and 1.0x P/BV against decent ROE of 11% and EPS CAGR of 36% in FY13-15F. However, we would like to see clearer signs of earnings delivery from previous M&As, and cash flow improvement before turning positive on the counter. Maintain HOLD. Our DCF-based TP is lowered to S$1.60 after factoring in earnings revisions and higher risk premium (WACC +0.6ppt).
Publish date: 30/08/13