Olam

Olam: 1QFY15 results review by UOB Kay Hian; Olam’s core net profit of $32.2m fell below expectations on lower contribution from the hazelnuts and dairy operation. The sharp decline in prices is not a good business environment for the supply chain operation as volume and prices are usually committed months ahead before delivery, which may lead to another volatile quarter for Olam before margins stabilise. The underperforming results were due to: a) Losses incurred for the early committed short position in hazelnuts as hazelnut prices jumped more than 50% within 6 months as frost cuts the total production from Turkey (produces 75% global hazelnuts) by about 35%. b) Poor performance from the dairy upstream operation in Uruguay and Russia. The dairy business was negatively impacted by: a) a sharp price decline due to high supply as Russia stopped buying dairy products from Europe, forcing European supplies to be redirected to other global markets, and b) inefficient operation in Uruguay. House maintains HOLD with TP of $2.35 and expects volume to pick up to compensate the weaker margins and the loss of volume from discontinued operations over FY15.