Tuesday, August 7, 2012

Olam

Olam: UOB Kay Hian maintains Buy with $2.55 TP. House note that US drought has led to a surge in selective agri-commodity prices. The S&P GSCI agri-commodity index has jumped by about 33% since the start of June. The jump was mainly led by wheat, corn and soybeans, which constitute about 25%, 31% and 16% of the increase respectively. The surge is not reflective of Olam’s portfolio of agri-commodities, which is highly diversified across about 20 commodities and includes those which are not commonly traded on futures exchanges. Note that Olam could face cost pressures as input costs for its wheat milling operations soar (est +50% from June). Earnings impact is however mitigated somewhat by trading business. Higher prices could mean improved net contribution margins from the trading business, where margins in percentage terms are relatively more stable. Counterparty risk from surge in wheat prices limited as Olam generally buys from the spot market and has limited long-term forward purchase contracts. Hence, there is lower risk of defaults from suppliers. A concern could stem from a potential collapse in wheat prices following the surge, which could see customers defaulting. However, believe the group is cognisant of the risks and would take steps to mitigate, eg by lowering VaRs and contracting with more reliable customers.

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