Share Price: SGD1.55
Target Price: SGD1.57
A mixed bag
Olam’s trading portfolio is practically immune to a potential drop in hard commodity demand.
A longer-term concern is its growth outlook following a significant cutback on capex for the next three years.
Short-term risks include lower commodity prices and uncertain outlook for coffee and cotton trading. Maintain HOLD.
Just wait and see
We maintain our HOLD rating on Olam with a target price of SGD1.57. We like Olam for its diversified agri-commodity portfolio, which is practically immune to a potential drop in demand for hard commodities in 2014. However, compared with the other two commodity traders, Olam’s involvement in upstream operations is more broad-based, posing a risk should commodity prices spiral downward. Moreover, its high gearing and cost of debt make it most vulnerable in a rising interest rate environment. Our longer-term concern remains the likelihood of a slowdown in growth due to a significant cutback on capex for the next three years.
In our view, major upstream asset divestments through sale-and-leaseback activities will serve as the key catalyst for Olam in 2014. We would welcome such a move if the price is fair because it can free up capital and strengthen the balance sheet.
Key risks include softening commodity prices given Olam’s big exposure to upstream plantations. In addition, the uncertain outlook for coffee and cotton could hinder the overall performance of the portfolio.
Publish date: 16/01/14