Back on track: Olam finally bucks profit downtrend

Food business leads gains in a stellar year.

Olam is finally recovering from the two-year decline in its margin profile, led by the Temasek takeover and strong gains in the food division.

According to Barclays, Olam’s share price has risen by 55% in absolute terms so far in 2014, and its stock has outperformed its peer group by 25-60%.

“The turnaround in the food business appears well under way with the business delivering three quarters of the margin improvement, which is sustainable, in our view. The rest of the businesses are also recovering well with industrial raw materials and confectionary being the key gainers,” stated Barclays.

Here’s more from the report:

OLAM has traded below its intrinsic value for the past two years primarily due to concerns over its balance sheet and its declining margin profile since FY11.

However, the strong recovery in FY14, especially in 3Q FY14 has led to a sharp re-rating for the stock. The 1-year forward earnings based multiple has recovered to its long-run average of 14x from -1SD of its long-run average.

On our FY15E estimates, the stock is trading at 10.6x earnings, which means earnings upgrades for consensus estimates could lead to further re-rating of the stock in next 12-18 months.

However, we expect the process of earnings upgrade and subsequent further re-rating to be more gradual compared with the latest re-rating, which has been quicker than expected.

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