FUTURE GROWTH POTENTIAL. Olams acquisition of

Nigerias Crown Flour Mills (CFM) marks the initiation of

its wheat-milling profile. With plans to expand CFMs

capacity, we expect Olams earnings to experience

significant growth in the coming years. More recently,

Olam has also announced plans to invest US$31.5m to

set up a wheat mill in Port Tema, Ghana. We believe

that this will strongly enhance Olams market presence

in the wheat milling industry of Africa.

ROBUST RISK MANAGEMENT. Despite Olams high

leverage and commitment to its growth plans, we expect

the increased revenue to generate sufficient cashflows

to meet to its financing and operating demands.

In analyzing the current performance of Olam, we report

the following key findings:

1) Higher profit margins compared to the industry.

2) Improving cash flow management can be observed

from its improving cash conversion cycle.

3) Healthy Financial Policies. Though, Olam traditionally

relies heavily on leverage to maximize shareholder

value, it has measures in place to ensure it is able to

service its debts.

The comparative analysis is made using ratios provided by

OneSource to give consistency. However, for forecasting and valuation, analytical

adjustments are made to the financial statements. Operating Leases are adjusted

and accounted for as finance leases. Export Incentives and Subsidies

Receivable are adjusted due to their potential un-collectability which was previously

not accounted for. And lastly, One Time Gains & Losses will also be excluded to

provide a more representative analysis.

G2 Analysts

Eldora Sim

Florence Wang

Tony Teo

Wu Li Mei

Our Recommendation

Price (as of 31/3/10) $2.64

Target $2.90

Executive Summary

G4 Analysts Andi Chen

Chris King Zhi Liang

Jerrold Yew Jin Wai

Thong En Yu Gloria

Our Recommendation

Price (20/5/10) 2.34

Target 2.55

Price (as of 31/3/10) $2.64

Target $2.90

BUY

Olam International Ltd is a Singapore-based global leader in the agri-commodities

supply chain processor of agricultural raw materials and food ingredients. Olams

core business activities include sourcing, origination, primary processing, risk

management, logistics, trading, marketing and distribution. Olams complete

integration value adds throughout the supply chain from the farm gate in the origins

to the factory gate of customers in destination markets. 1Olam has a diversified

portfolio with built leadership positions in cocoa, coffee, cashews, sesame, rice,

teakwood and many others which can be categorized into 4 main business segments:

Edible nuts, spices and beans (14%)

Confectionery and beverage (44.1%)

Industrial raw materials (17.1%)

Food staples and packaged foods (24.9%)2

Olam was listed on 11 February 2005 on the Singapore Exchange and is now a

component stock of the Straits Times Index, MSCI Singapore Free, S&P

Agribusiness Index and DAX global Agribusiness Index . Its business model and

strategy has also helped them to earn the recognition of being the only Singaporean

firm to be named in the 2009 Forbes Asia Fabulous 50, an annual list of 50 big cap

and most profitable firms in the region and 2009 lists for the Global Top Companies

for Leaders and the Top Companies for Leaders in the Asia Pacific region.

1 Olamonline.com company profile

2 OneSource Information Services, Inc., March, 2010

Company & Environment Analysis

Business Profile

Olams SWOT (Strengths, Weakness, Opportunities, and Threats) analysis

Macro-environmental factors analysis of Olam

Wilmar International - Comparative

Wilmar International Limited was founded in 1991 as a palm oil company and is

currently Asias leading agribusiness group. It was listed on the SGX main board on

20 July 2000 and is amongst the largest companies by market capitalization.

Its core business activities include oil palm plantation, processing, and consumer

merchandising.3

Unlike Olam, Wilmar is mainly involved in the processing and merchandising of palm

and edible oils globally. Wilmar has also established its own house brands of

consumer edible oil. With palm oil becoming increasingly important in the energy

market due to the fast depleting fossil fuel, Wilmar is indeed well poised for the future.

Noble Group is a market leader in managing the global supply chain of agricultural,

industrial and energy products. It was founded in 1987 and was listed on 14 March

1007 on the SGX mainboard. The company operates in four segments:

Merchandising and Processing, Consumer Products, Agriculture and Energy

Product.4

Despite its diverse portfolio of raw materials and natural resources ranging from

cocoa, coffee, and sugar to carbon credits, coal, coke, and oil, Noble Group in

mainly involved in the oil, gas and power division. Recently, Noble Group has

successfully expanded their oil, gas and power division.

3Wilmar Iternational Limited, Wilmar International Limited. Retrieved on 17, May , 2010 from

http://www.wilmar-international.com/about_index.htm 4Noble Group, Who we are. Retrieved on 17, May ,2010 from

http://www.thisisnoble.com/index.php?option=com_content&task=view&id=553&Itemid=85

Noble Group - Comparative

Cumulative Historical Analysis

Historical Analysis for Olam (Feb 2008 May 2010)

Key Development (Feb, 2008 & Apr, 2008)

As shown in Point 1, the global financial crisis resulted in a tremendous decrease in

share prices. At Point 2, the announcement of preferential shares led to the increase

in share prices.

Key Development (Nov, 2008)

At Point 3, share prices decreased after Merrill Lynch downgraded the shares to an

underperform rating from buy due to a predicted commodity slowdown5.

Key Development (May, 2009)

At Point 4, Olam International Ltd entered into a subscription agreement with two

Temasek Holdings subsidiaries, Aranda Investment Pte. Ltd and Breedens

Investments Pte. Ltd 6. It intended to raise approximately SGD$437.5 million by

5 Thomson Reuters, Singapore Hot Stocks-Noble, Olam dips after Merrill downgrade. Retrieved on 20, May,

2010 from www.reuters.com/article/idUSS11717820081118 6 Bloomberg.com, Temasek buys Olam Stake, Shifts Focus to Commodities. Retrieved on 10 May, 2010 from http://www.bloomberg.com/apps/news?pid=20601014&sid=aubU65EttaaY,

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Historical Analysis for Olam (Feb 2008 May 2010)

Stock prices

Shares ratings

downgraded

Fall in net profit

5

Best quarterly

performance 7 6 Temasek

investment 4

3

2

Announcement of Preferential

shares

1

Financial

Crisis

Convertible bonds spark

fears of shares dilution

issuing 273 million new shares at the price of SGD$1.60 per share. This allowed

Temasek Holdings to take the opportunities to invest in raw material trading by

investing $302.78 million in Olam International Ltd.

Key Development (Aug, 2009 & Sept, 2009)

In August, at Point 5, Olam s decrease in net profit resulted in a fall of share prices7.

During September, at Point 6, share prices dipped 7.3% after it announced its plan to

sell $400 convertible bonds triggered fears of shares dilution8.

Key development (February, 2010)

During Feb 2010, Olam International reported their best ever quarterly performance.

The declaration of their increase interim dividend of 2 cents per share boosted their

stock price for the Feb 2010 period9.

7 Thomson Reuters , SE Asia Stocks-Spore flat, Philippines outperforms on the week . Retrieved on 20,

May,2010 from www.reuters.com/article/idUSBKK51558120090828 8 Thomson Reuters , SE Asia Stocks-Near two-week lows, but Thailand ends flat. Retrieved on 20,May,2010

from www.reuters.com/article/idUSBKK54088320090902 9 The Business Times, Olam Q2 gain hits quarterly record of $ 158.9m . Retrieved on 18, May, 2010 from

http://olam.listedcompany.com/misc/BT%20-%20Pg%208%20-%20Feb%2012%20'10%20-%20Olam%20Q2gain%20hits%20quarterly%20record%20of%20$158.9m.pdf

Profitability

Table 1: Net Profit Margin

Olams Net Profit Margin has been

relatively stable at 2% from 2005 to

2008. In 2009, its Net Profit margin

improved to about 2.9%. This was

probably due to the improvement in the

economic climate which increased the

demands for their products. The

increase in Net Profit Margin can also be

seen in Noble and Wilmar. Nevertheless, Olam had a lower Net Profit Margin

compared to Wilmar.

Financial Strength

Figure 2.1 Current Ratio Figure 2.2 Olams Current vs Quick

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2005 2006 2007 2008 2009

Olam

Wilmar

Noble

2005 2006 2007 2008

Current 1.28 1.49 1.57 1.33

Quick 0.57 0.56 0.49 0.37

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2005 2006 2007 2008 2009

Olam

Wilmar

Noble

Historical Performance Analysis Financial Ratios

Olams current ratio is healthy and relatively stable. It averages around 1.4 which is

in line with industrys average. However, there is a trend that a significant proportion

of Olams current asset is made up by its inventories, increasing at a rate of 6.4% on

average per annum, as seen in Figure 2.2. Hence, there is indeed a huge concern of

Olams inventory management and her ability to meet her short term obligation given

her decreasing quick ratio.

Figure 2.3 Net Working Capital Working capital measures the

firms efficiency as well as its

short-term financial health. As

all three firms have positive

working capital, it shows that

all three are able to meet their

short term liabilities. Olams

Net Working capital has been

stable as compared to its competitors and its Net Working Capital has also improved

as a result of its effort in improving its Days Payable and Receivables.

Efficiency

Figure 3.1 Days in Inventory Figure 3.2 Days in Payable Outstanding

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40

50

2006 2007 2008 2009

Olam

Wilmar

Noble

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Noble

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2005 2006 2007 2008 2009

Olam

Wilmar

Noble

As illustrated in Figure 2.1, Olam is seen to be taking more days in turning over its

inventories as compared to Wilmar and Noble. Inventories are generally stored on an

average of 113 days before sale. Its longer inventory turnover is due to its business

nature as a food commodity company where inventories are usually stored longer

before sale.

Figure 3.3 Cash Conversion Cycle In addition, Olams days in payable

outstanding is relatively short compared

to its days in inventory. As a result, the

cash conversion cycle (CCC) of Olam

would be very much longer compared to

her peers, which can be seen in Figure

2.3. Hence, we do expect Olam to

experience cash flow problems especially if the company is unable to collect her

receivables on time. Noble, on the other hand, has the shortest cash conversion

cycle due to its short days in inventories and long days in outstanding payable.

Compared with Noble, Olam has room to improve in managing its working capital.

Table 3.4: Asset Turnover In addition, Olams asset turnover

is very much lower compared to

Noble. Nobles higher net value of

its products as well as her ability

to keep inventory levels low are

key reasons which Noble is able

to attain a high asset turnover.

Hence, we expect Olam to do better in improving its overall efficiency.

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160

180

2006 2007 2008 2009

Olam

Wilmar

Noble

0.00%

1.00%

2.00%

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6.00%

2005 2006 2007 2008 2009

Olam

Wilmar

Noble

Leverage

Figure 4.1 Total Debts / Equity Figure 4.2 Long Term Debt / Equity

Olams reliance on debts to finance its growth compared to Wilmar and Noble group

can be seen in Figure 4.1 and 4.2. The issuance of 300 million convertible bonds in

2006 resulted in a sharp spike in total debt to equity. Olam uses most of its

borrowings to finance its expansion and acquisitions. However, due to the recent

financial crisis, the management made efforts to degear its balance sheet by

relying lesser on debts, paying off some of its debts and buying back of convertible

bonds.

Management Effectiveness

Figure 5.1 Return on Asset Figure 5.2 Return on Equity

0

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2

2.5

2005 2006 2007 2008 2009

Olam

Wilmar

Noble

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2005 2006 2007 2008 2009

Olam

Wilmar

Noble

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10.00%

2005 2006 2007 2008 2009

Olam

Wilmar

Noble

All three firms are profitable and looking at Olams ROA, it is able to generate more

than 3 times with each dollar in asset. Olam also has a relatively stable return on

asset compared to Wilmar and Noble group. Olams ROA has been stable and

averages around 3.9% and in 2009, it improved to 4.73%. On the other hand,

Wilmars high ROA is attributable to her huge net profit margin which offsets her

relatively smaller asset turnover

With Olams high financial leverage, Olams ROE has outperformed her competitors,

growing from 19.16% in 2005 to 29.93%. Since 2007 to 2009, it has better ROE

compared to Wilmar and Noble.

Figure 5.3 DuPont Analysis for FY2009 As discussed in the leverage

section, Olam relies more on

debts to finance its growth.

Hence, Olams equity

multiplier is very much higher

than Wilmar and Noble group.

Nevertheless, Olams

management is making a

conscious effort to degear and

it is likely that its Equity Multiplier will decrease. This will also help increase investor

confidence in Olam and reduce risk.

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OlamWilmar

Noble

Net Profit Margin

Asset Turnover

Equity Multiplier

Beta and Sharpe Ratio

Risk can be divided into systematic risk and unsystematic risk. Since unsystematic

risk can be diversified away with a portfolio, it carries no reward. The expected return

on a risky asset depends only on its systematic risk, which beta measures. Investors

can find the best use of the beta ratio in diversifying his portfolio risk as well as the

required rate of return.

* Using Rf = 3.31 as the average daily closing yield of 20-year Singapore Government Bond for the month of April (NZ07100S)

The commodities market is populated by traders whose primary interest is to make

short term profits by speculating which direction the price of a security is likely to

move. Hence, they will tend to move the market in different ways. Although

speculators provide the much needed liquidity to the markets, they also tend to

increase market volatility. This explains why the beta is higher than 1.

Olam

= 1.31 ri = 3.46% = 8.64% CV = 2.5 Sharpe = 0.017

Wilmar

= 1.005 ri = 4.51% = 8.44% CV = 1.88 Sharpe = 0.142

Noble

= 2.010 ri = 3.61% = 9.68% CV = 2.68 Sharpe = 0.030

Risk Analysis

While Olams stock has more systematic risk in relation to the overall market and

industry standard, her beta is slightly more compared to Wilmar. Hence, the required

rate of return for Olam is higher given the relatively higher risk she is exposed to.

However, looking at beta is not enough to evaluate risk. By calculating the rate of

return using the change in price and dividend yield, we are able to find out the

average monthly rate of return and the corresponding standard deviation using a 5

year period. As a result, Wilmar has the lowest coefficient of variation of 1.88, which

would mean having the least risk for every return gain.

Correspondingly, the Sharpe ratio for Wilmar is significantly much larger than Olam

and Noble. Wilmar proves to have the best return for each unit of risk taken. This

means it generates a higher return per unit risk compared to Olam. Hence, we do

advise investors to invest in Wilmar if he has sufficient capital to do so.

Taking a closer look at Olam and Noble Group, both firms have relative similar

monthly rate of return. However, looking at the coefficient variation, Nobles

coefficient variation is more than Olam, and its beta is almost twice of Olam. Hence,

this makes Olam a more attractive stock to invest in since risk per unit of return is

lower while giving similar return compared to Noble.

Forecast

To arrive at our forecasted figures, some adjustments to the financial statements

were made.

Gain on buy-back of convertible bonds (gain of 80.6M)

Allowance for potentially uncollectible export incentives and subsidies

Operating leases

These adjustments were necessary as these gains are either non-recurring or off-

balance sheet. Without adjustments, they will serve to inflate revenue figures and if

forecasts are based on these historical data, the accuracy and reasonableness of

the forecasts will be compromised. Thus, the adjustments helped to better reflect the

economic reality of the firm as well as revenues and expenses for future years.

How revenues are forecasted:

1. Choose a representative product from each of Olams 4 main business

segments based on their net contributions.

For instance, for the Confectionary and Beverage segment, Cocoa was

used, for the Industrial Raw Materials segment, cotton, and finally, for

the Food Staples and Packaged Foods, rice.

2. Use future projected global consumption data of the respective representative

products taken off Bloomberg

3. Arrive at our forecasts of revenues for each of the 4 main business segment

by taking into account the future consumption trend of each segment

4. Multiply the revenue of each business segment by their share in Olam to

arrive at the total forecasted revenue.

Valuation

5. Based on different revenue drivers, other line items such as expenses

(depreciation, staff costs, taxes) are derived to arrive at the forecasted net

income for the next 4 years (2010 2013).

Price-Earnings Ratio Approach

As seen in Figure 6, for most years (2005 to 2008), adjusted EPS is similar to non-

adjusted EPS. It is only in 2009 where there was a substantial difference. This is

mainly due to the one-time gain from the buy-back of convertible bonds in 2009

which resulted in a gain of 80.6 million for Olam. Since the buy-back of convertible

bonds is unlikely to be recurring and by excluding it in the estimation of net income

for 2010, net income will not be overstated and hence adjusted EPS will better reflect

the performance of Olam. Hence, by taking the average of the forecasted EPS from

2010-2013, we arrived at an estimated forward EPS of 0.1154.

For prudence and conservatism, we assume the forward P/E is equivalent to the

average current P/E ratio for Olam, Noble and Wilmar, which is 15.72

* Based on P/E ratio from Bloomberg Data

0

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0.06

0.08

0.1

0.12

0.14

0.16

2004 2006 2008 2010 2012 2014

Figure 6 EPS Prediction

EPS(adjusted)

EPS(unadjusted)

Forward Average EPS =

0.1154

Predicted Share Price of

$1.81

X Forward P/E* = 15.72

=

Fundamental Valuation (FCFF)

Since Olam is not paying a dividend at a constantly growing rate, we will be using

the FCFF model to estimate its stock price. This model is suitable in this case due to

Olams financial structure. Olam has held a high leverage in the past and its D/E

ratio has an average of 3.94 in the past 4 years. Therefore, the company will seek to

clear its debts in the future to improve its financial status.

In order to estimate future cash flows, forecasted figures were used. Net cash flows

from operations were used to estimate the free cash flow to the firm and the

industrial average growth rate was extracted from Bloomberg as the terminal growth

rate. We assumed that the company will grow at this industry rate after 2013.

The calculation for WACC is shown below:

Since average D/E =3.94, D/A = 0.798 & E/A = 0.202

Valuation

WACC 9.24%

Terminal Growth Rate* 3.92%

* Based on industrial historical growth

Cost of Debt

A-T rd = B-T rd (1- Tax Rate)

= (10) (1 - 0.17) = 8.3%

Cost of Equity Dividend Cash Flow

g = (1 Payout) (ROE)

= (1 - 0.35) (17.51) = 11.38%

D1 = D0 (1+ g) = (0.035) (1+0.1138) = 0.0390

rs = (D1 / P0) + g = (0.0390 / 2.46) + 0.1138

rs = 13.0%

WACC

(0.798) (8.3) + (0.202) (13.0) = 9.24%

FCFF 2010F 2011F 2012F 2013F

Net CFO after interest and tax 57,014 476,788 616,686 360,738

Interest Exp* (1-tax rate) 223,952 233,750 228,409 224,466

Net Capital expenditure (125,328) (152,906) (167,479) (132,801)

FCFF 155,637 557,632 677,616 452,403

PV Factor 1.09 1.19 1.30 1.42

PV of FCFF 142,473 467,288 519,803 317,686

Terminal Value (Td)

8,837,163

PV of FCFF 1,447,250

PV of terminal value 6,205,633

Enterprise value 7,652,883

Net Debt (VD) (3,005,762)

Equity value (P0) 4,647,121

No. of shares 1,819,760

Value per share 2.55

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While the price using PER approach stands at $1.81, we believe the price of $2.55

using FCFF gives a better reflection as it assumes firms growth to perpetuity,

whereas the PER approach relies on the current P/E ratios of Olam and its

competitor, which may not necessarily reflect the true forward P/E of Olam.

Comparing with Analyst Report

FCFF RBS Bank

Deutsche Bank

Kim Eng DBS

Vickers

Date Reported

9 Dec 2009 12 Jan 2010 13 Jan 2010 12 Feb 2010

Target Price

2.55 1.63 2.08 3.10 3.29

Comparing to prices from the analyst reports, it is indeed very reasonable to suggest

a target price of $2.55 which is currently under-priced at $2.34. The optimistic figure

given by DBS Vickers has factored in Olams Q3 earnings. However, given the

uncertainty surrounding Europe, we believe that investors should remain cautious.

Hence, we recommend a Moderate Buy call at $2.55 as we are confident that

Olams growth plans will improve the future outlook of the company.