Olam International - Steady growth

3Q09 results in line with expectations. Olam International Ltd's (Olam) 3Q09 results were in line with expectations. Revenue slipped 4.8% YoY to S$2.3b on lower commodity prices, but this was partially offset by volume growth. Reported net profit surged 56.1% to S$87.0m, mainly due to non-recurring gains from the buy-back of its convertible bonds. Stripping off these gains, core net profit would still have risen by a credible 12.0% to S$62.4m. Olam's 9M09 core earnings have met 67% of our full year estimate. We are leaving our projections intact since 4Q is a seasonally strong quarter.

Steady growth in volume. Olam registered a 6% YoY increase in overall volume in 3Q09. Edible products, which made up 79% of the group's revenue, formed the backbone of this growth, while industrial raw materials succumbed to weak demand. This is not surprising, given the relative inelasticity of demand for food. Olam's various food segments registered volume growth in the range of 8% to 16% in 3Q09. Its Fibre & Wood segment, on the other hand, languished with a 16% YoY decline in volume handled.

Healthier cash flow. Commodity price disinflation eased working capital requirements and boosted Olam's cash flows. 9M009 operating cash inflow improved significantly to S$108.1m from an outflow of S$192.0m a year ago. 3Q09 saw a YoY decline in operating cash flow, but this was due to a later procurement season coupled with the late arrival of crops, which delayed payment to its suppliers to the current quarter.

Light at the end of the tunnel? There have been signals suggesting that commodities markets could be bottoming out. According to management, prices and trading volumes of commodities such as cotton, wood and dairy rebounded sharply in April and May, providing a glimmer of hope that recovery could be in sight. For now, however, it remains premature to conclude if the rebound is due to genuine improvements in fundamentals, or whether it is purely a case of inventory restocking, in which case the rally could be short-lived.

Upgrade to BUY. Having delivered a 16.6% growth in 9M09 volume, Olam is on track to meet its target of 16% growth in FY09 volume. Olam has been a laggard in the recent rally, and is now trailing at 13.5x FY10F PER vs. the STI's 15x. We believe that Olam will continue deliver consistent growth, and are raising our valuation parameter to 15x (from 11x), and fair value estimate to S$2.06 (from S$1.51). Upgrade to BUY.

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