Olam

Olam: 3QFYJun12 results disappoint. Weaker than expected net profit of $99m, -22% yoy, largely driven by weak volumes (-7% yoy) in the Industrial Raw Materials (IRM) segment, particularly in the cotton and wood business. According to mgt, cotton farmers in Australia have withheld their record harvest in anticipation of higher prices, disrupting normal procurement in the quarter. Typically by Mar, all of the current year’s harvest is sold and 30-40% of next year’s crop is contracted. However, farmers have sold only 60-70% of the current harvested crop and <10% of next year’s crop, affecting volumes for Olam. Mgt noted this situation could continue into 4Q12, with expected recovery over the next 9-12mths. Otherwise, Olam’s food business was broadly in line, delivering volume growth of 26% yoy, and stable margins, though not sufficient to offset the tough trading conditions in IRM. JPM slashes TP to $2.30 from $2.80, has a Neutral rating. Morgan Stanley keeps at Overweight. Goldman keeps at Buy but cuts TP to $2.60 from $2.80. Both expect the IRM weakness to be temporary. Citi keeps at Buy with TP $3.10, but notes while Olam’s PE is attractive relative to its historical band, it is in need of catalysts, especially from its various fixed asset invmts it has made, and which are currently in various stages of gestation.