Olam

Olam: announces the much anticipated annual strategic review, broadly in line with market expectations. The co introduced initiatives to improve balance sheet strength and cash flow, although this will be weighed against a slower profit growth trajectory (shed the $1b net profit target by FY16). Capital spending will be slashed by ~$1b. Olam will seek to raise approx $1.5b in cash by FY16 by selling assets and scaling down some operations. Olam will spend between $1.2b to $1.6 b in the 3 years through FY16, compared with an earlier target of $2.2b to $2.6b. It also wants to cut its gearing ceiling (ie. debt to equity), to a max of 2x, from 2.5x, as it seeks to become free cash flow positive from FY14. Olam will also seek to reduce its stake in the proposed Gabon fertilizer plant (original est cost of US$1.3b), to less than 50%, which will take it off balance sheet. The commodity trader also wants to save $80-100m pa in operating costs by 2016. The company will seek to restructure its wood and dairy businesses, and make its sugar business “more asset light”. The results of the review come five months after short-seller Muddy Waters first questioned the finances of Olam and likened it to failed energy traded Enron Corp. Nomura (Buy, TP $2.30) thinks the strategy should alleviate the stock market sentiment, as it addresses investors’ key concerns surrounding cash flows and pace of capex. StanChart (Outperform, TP $2.12) sees the strategic review as share price supportive; should act as the catalyst for the market to start re-thinking upside potential. Believes risk reward dynamics are positive. Maybank KE however maintains a Sell with TP $1.37 (from $1.30), believes current share price has likely priced in this strategic recalibration, expects time wil be needed for both the equity and debt risk premium to be restored.