Olam

Olam: 1QFY12 results were largely inline with consensus forecasts, but expect market to react positively, as market concerns that Olam may make losses in cotton did not play out.

Olam reported net profit of $34.2m, +15% yoy, contributing to ~8% of consensus full year earnings estimate. Typically, 1Q is the seasonally weakest quarter, accounting for 5-10% of full year profit.

Overall sales volume grew 17.7% while net contribution (NC) per ton rose 5.5%.
Confectionery & beverage segment recorded the strongest growth in volume, +23.5% yoy. The coca business is progressing well and continues to integrate the operations of newly acquired Britannia during the quarter.
Edible nuts, spices & beans segment posted the strongest increase in margins with NC per ton increasing by 29.6% due to expansion into upstream as well as value-added downstream processing.
The industrial raw materials segment managed to chalk up volume growth of 8.7% but NC per ton declined by 24% due to tougher operating environment (weak demand, extreme price volatility, and increased counter party risk). Nevertheless, Olam’s cotton business was relatively resilient, and supply side defaults were limited.

Going forward, the co believes the cotton mkt has normalized. Mgt reinforced guidance of US$1b earnings by 2016F.
Net gearing improved to ~1.7x from 2.2x in the last quarter.
Olam now has enough war chest to fund $2.5b in new capex (ex committed equity) without risk of further dilution.

Nomura keeps at Buy with TP $3.50.
Deutsche keeps Buy with TP $2.90.
Goldman maintains Neutral with TP $2.85.
OCBC downgrades to Hold from buy with TP $2.63, given limited upside potential from current share price.