Olam reported 2QFY09 net profit of S$103.4m, up 173% YoY. Excluding the one-time gains of S$55.9m from the repurchase of convertible bonds, net profit would have been S$47.5m, up 25.3% YoY, in line with our expectations.

1HFY09 gross contribution rose 23.5% or S$71.9m YoY to S$377.8m. The key growth contributor was the confectionery and beverage ingredients segment, which registered a S$29m increase. Food staples and packaged foods accounted for another sizeable S$20m of increase.

Balance sheet strength remains acceptable. Olam has a net debt to equity ratio of 2.5x. After adjustments for stocks and debtors (which are liquid and cash-like in nature), the ratio falls to 0.55x. Weakness in commodity prices has led to reduced working capital requirements ? inventories fell 7% HoH to S$1.66b whilst trade receivables fell 34% HoH to S$481m.

Olam maintained its volume growth guidance of 16-20% CAGR for the next three years, and bottom line earnings growth of 25-30% CAGR. Olam management expects FY09 growth to be at the lower end of the guidance range.

We raise our FY09 net profit forecast by 40% to S$251.6m, primarily due to the one-time gains from repurchase of convertible bonds. We raise our price target to S$1.83, from S$1.60, due to the fall in market risk premium from 10.85% to 8.51% for our DCF valuation. Olam now trades at FY09 PE of 9.2x, which is low considering its long-term sustainable earnings growth.Maintain BUY.