Olam

Olam: UOB Kay Hian maintains Buy with $2.58 TP. House note that the Financial Times (FT) reported three days ago that China customers have defaulted for several commodities including coal, iron ore, soybeans and cotton. House spoke to Olam, who highlighted that grp’s counterparty default issues were mainly encountered in Bangladesh, not from China or India. As prices have declined yoy and weak demand is setting in, there are heightened counterparty risks and customers may try to renegotiate contracts that were previously entered into at higher prices. According to Olam, most of these have largely been accounted for in 9MFY12. Australian cotton is still a key to recovery. It was re-iterated that low cotton vol in Aus were the main cause of depressed profitability in Olam’s industrial raw material (IRM) segment in 3QFY12. Also noteworthy was that cotton was positive at the NC level despite the challenges during the qtr. Continued weakness is expected in 4Q12 but vol are expected to come through only in 1Q13. Given that Olam has to continue expensing its overheads, house believe Olam has made losses in the cotton business, leading to significant impact at the net profit level. In view, this could reverse in 1QFY13, resulting in improved margins for FY13. Overall, believe that mkt is ignoring defensive nature of Olam’s food commodity business. However, believe the stock is currently overly discounted and is trading at attractive trough PE and P/B valuations. Olam’s relatively defensive food commodity portfolio should provide support to the stock price at current levels.