Olam International
Premium Rating Already Reflected In The Price
S$1.71
Olam is a globally integrated supply chain manager of agriculture products and food ingredients in over 41 countries. Its strategy is to procure commodities primarily from Farm Gate farmers, unlike most of its competitors who source their products further down the chain. Sourcing from the Farm Gate farmers allow Olam to reap wider margins, as Olam can better meet customer requirements eg by location-specific quality, or by organic products certification.
Concept to aim for leader position is sound. Olam aims to be amongst the top 3 players globally in each of its product segments. Olam targets a market share exceeding 10%, in the belief that a leadership position offers better pricing control, hence enhancing margins.
Hedging reduces earnings volatility. Olam's strategy is to hedge its exposure to commodity price changes as much as possible, through the use of futures instruments. However, Olam is not involved in speculative trading. Hence, the risk of substantial earnings fluctuations is low.
Strong fundamentals but valuation is rich relative to peers. Despite our expectations of FY06 and FY07 net profit expansion of relatively good 31.0% and 20.2% respectively, we are initiating coverage with a HOLD call. This is because Olam trades at a premium over its peers. Noble Group and Li & Fung, which are larger than Olam in terms of turnover and market capitalisation, trade at much lower PE ratios. Our fair price for Olam of S$1.63 is based on 24x FY07 PE. Buy below S$1.45.
