Olam International Ltd: Takeaways from Vietnam plant visit

Robust demand for food will drive growth. We visited Olam International Ltd's (Olam) operations in Vietnam, where the group showcased its cashew, pepper and coffee processing facilities. Vietnam, which contributes 6%-7% of the group's volumes and revenue, is a key sourcing country for the group and houses its coffee, cashew, pepper, wood, rice and cotton operations. Olam projects continued growth in demand for edible agricultural commodities, which forms 79% of the group's revenue. In particular, cashew was identified as one of its key growth drivers, thanks to growing demand for cashew ingredients for use in products such as ice cream and chocolate. The group is setting up a new cashew processing plant in Vietnam (projected completion in 2H CY10), which will double its existing capacity and drive volume growth.

Strategic advantages in a fragmented industry. Olam operates in a highly competitive and fragmented industry. Nevertheless, it has created strategic advantages to differentiate itself from its peers. For instance, it has obtained internationally-accredited food safety certifications such as the HACCP and AIB certifications which are required by US food makers. In addition, its ability to customize products according to customers' specifications and its track record of delivering consistency has helped to build customer loyalty. We believe that these are some of the factors that have enabled Olam to clinch long term contracts with well-established brands such as Nestle and Kraft, and these will empower the group to gain market share from weaker competitors.

Maintain HOLD ahead of 3Q09 results. Olam will be announcing its 3Q09 results on 14 May 09. Details worth paying attention to include its volume growth, as well as its gearing and working capital requirements, which we expect should ease given the environment of falling commodity prices. We are keeping our earnings estimates intact and believe that management's guidance for a 25% growth in FY09 earnings remains achievable. We see merit in Olam's resilient earnings growth profile amid a recessionary environment. However at current levels, positives appear to have been priced in given that Olam trades at a relatively expensive 15.0x FY09F PER (vs. peer Noble Group Ltd which trades at 7.4x PER). In addition, in view of the recent share price appreciation, we maintain our HOLD rating on the stock. Our fair value estimate remains at S$1.51.

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