Company Updates

RESILIENT to recession: Olam International Ltd (Olam) has been delivering consistent revenue and earnings growth since its listing in 2005, and growth momentum is expected to sustain despite the global recession.

Management has guided for 16 to 20 per cent topline CAGR and 25 to 30 per cent earnings CAGR over the next three years. These goals are achievable, given that demand for food is relatively inelastic and earnings are therefore less vulnerable to the global economic downturn.

Olam has already proven its resilience by delivering a 32.9 per cent growth in H1 2009 core earnings despite the recent collapse of commodity prices, demonstrating its ability to perform under difficult conditions.

Growth opportunities abound: The global economic turmoil has presented Olam with organic and inorganic growth opportunities. The group has been expanding its market share at the expense of weaker competitors, who have been ousted as a result of the credit crunch and economic downturn.

At the same time, distressed assets have emerged following the financial meltdown, presenting the group with M&A opportunities. Management has articulated its interest to pursue bite-sized acquisitions, but remains cautious to contain its gearing levels.

But gearing is relatively high: Olam's key weakness, in our view, is its high gearing ratio. It is more heavily geared than its peers, with total debt to equity ratio of 4.67x, substantially higher than its peers, whose gearing ratios range from 0.48x to 1.38x.

Even after adjusting for its hedged inventories and receivables, gearing remains above that of its peers'. The group's reliance on debt could pose refinancing risks in the event of a protracted credit crunch. Rising interest costs could also erode profit margins should the group find itself unable to pass on these higher costs to its customers.

Valuations near historical trough; initiate with 'buy': The equity market meltdown has brought Olam down to its trough valuations. We see value emerging at current levels although the volatility could persist in the near term. Olam's key investment merit lies in its resilient earnings growth profile against a climate of earnings contraction. We initiate coverage on the stock with a 'buy' rating and $1.37 fair value estimate based on 10x FY10 PER. Key risks include high gearing, counter-party risk, and dilution risk from its convertible bonds.
BUY


CHALLENGING times: We are turning more cautious on ST Engg's earnings outlook, in the face of the most challenging economic conditions seen in over two decades. We are therefore tempering our earnings growth forecasts, due to a higher assumption of provisioning for bad debts on some of its contracts.

Assuming higher risk profile: We have assumed higher risk mainly on contracts with 1) non-sovereign customers, 2) riskier country profiles and 3) non-defence related contracts. We are also factoring in lower earnings from non-orderbook business in the aerospace division, where conditions are still challenging.

Majority of orderbook still very secure: We see increased risk to geographies such as Greater China and the Middle East. Shakier business segments include low-cost airlines and aviation in general. However, these contracts still represent less than 5 per cent of ST Engg's overall orderbook, and are tempered by ST Engg's own risk controls.

Cutting forecasts by 7 per cent: FY09 earnings are therefore trimmed by 7 per cent to $480.7 million, which implies modest 1.5 per cent growth y-o-y. FY10 earnings are similarly cut by 7 per cent to $508 million. ST Engg's orderbook stands at $10.6 billion, of which it expects to deliver $3.6 billion for FY09, or about 66 per cent of our turnover projection.

Premium valuations run higher risk of de-rating: ST Engg continues to trade at some of the highest valuations in the Singapore market. Price to book ratio stands at 4.6x versus the STI's 2.4x, and FY09 PER stands at 14.0x versus 7.3x for the index.

While we believe that premium valuations are justified due to ST Engg's outstanding track record, any disappointment or underperformance from the company will negatively impact the share price more severely.

Maintain 'buy', TP $2.70: ST Engg has re-affirmed it will still pay out 100 per cent of earnings as dividends. However, along with our earnings cut, we are raising our risk-reward threshold by pegging a minimum 6 per cent yield from FY09 projected dividends. This generates a TP of $2.70, from $3.60 previously. With an upside of 20 per cent and dividend yield of 7.7 per cent, we maintain our 'buy' call.
BUY

Reference :

BT