Will Olam taste a sweet success this year?

It may have outperformed since the start of the year but analysts are still not entirely convinced.

But OCBC recognises that demand for soft commodities, especially the essential food items, will continue to be well supported by population growth in China.

Here’s more from OCBC:

Sharp recovery in share price.
Since the start of the year, Olam International Limited’s share price has staged a sharp recovery, rising 24% YTD to hit a recent high of S$2.64. It has also rebounded 28% from its 52-week low of S$2.06, given that it was one of the underperformers last year.

We believe that the recent outperformance was most likely driven by both liquidity and talks of an impending monetary easing in China, brought on by specter of weaker-than-expected growth prospects in the world’s second largest economy.

Global economy not out of the woods.
And elsewhere in the world, the economic outlook is not much better. In fact, the IMF has just cut its forecast for global economic growth this year to 3.3% from 4.0% (made in Sep 2011), noting that the European debt crisis could threaten to derail the global economy.

In its latest revision, the IMF now expects the euro zone to enter into a “mild recession” with growth likely to shrink by 0.5%. Even for China, the IMF now expects its economy to grow by 8.2%, down from an earlier 9.0% forecast. As such, the demand for commodities, especially industrial metals, could remain weak in the near term.

Maintain HOLD with higher S$2.63 fair value.
In view of the still uncertain economic outlook, we are not entirely convinced that the worst is behind us. Nevertheless, we recognise that demand for soft commodities, especially the essential food items, will continue to be well supported by population growth in China and the other developing countries.

As such, we are bumping up our valuation peg from 14x (1 standard deviation below its 5-year mean) to 18x (0.5 SD below the mean) FY12F EPS, which in turn raises our fair value from S$2.05 to S$2.63. Given the limited upside, we maintain our HOLD rating.    

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Tags: Olam International share price, Olam International