Olam reported 3QFY09 net profit of S$87.0m, up 56% YoY. Excluding the one-time gain of S$24.6m from buy-back of convertible bonds, net profit would have risen 12% YoY, in line with our expectations.

Food volumes expanded well. Volume expanded 14.8% YoY to 4.3m metric tons for 9MFY09, reflecting continued growth for the business. The food category recorded a 18.5% YoY tonnage growth, whereas the fibre & wood products segment recorded a marginal 1.2% growth. This points to the resilience of the food business even in times of economic recession. However, some signs of de-stocking have surfaced for the cocoa business, and this may augur weakness for the food business going ahead.

9MFY09 gross contribution (GC) rose 14.5% to S$573m. This was driven by growth across all segments except Fibre & Wood. GC per ton remained at S$133/ton. 9MFY09 net contribution (NC) also expanded 12.2%, with Fibre & Wood being the underperformer.

Net debt to equity fell from 3.17x (Jun 08) to 2.51x. Adjusting for stocks and debtors (which are liquid in nature), net debt to equity will fall to 0.83x, which is not excessive. Although overall volume growth remains strong, we are concerned that the fibre & wood segment weakness in NC may persist as we progress through the recession. This may also cap the overall NC per ton.

Downgrade from BUY to NEUTRAL. We raise our FY09 net profit forecast by 4% to S$262.3m, primarily due to the one-time gains recorded in 3QFY09, but partly offset by slower core business. Our FY10 net profit forecast has been cut by 7% to S$215.3m to factor in weaker demand. Target price remains unchanged at S$1.83. Given the recent surge in Olam share price, we therefore downgrade Olam from BUY to NEUTRAL.