Expect a 0.4% hit on Olam earnings: DBS

This is due to the $2 million loss the company will incur over FY13-14 to start up its new rubber plantation in Gabon.

Then comes the long wait for the payoff. DBS estimates that revenues will only start trickling in by FY19, during which the rubber trees will have matured and can start producing rubber to meet Gabon's increasing demand.

Here's more from DBS:

Olam announced that it will develop 28k ha of rubber plantation in Gabon jointly with Republic of Gabon (RoG).

Olam also detailed its rubber strategy, which includes potential investments in plantations in Laos and Cambodia as well as rubber processing assets in Indonesia.

Olam is attracted to the natural rubber industry due to: 1) Strong rubber demand outlook. Olam estimates rubber demand to grow at 3.3% p.a. (DBSV forecasts at 3.7% p.a.) over the next decade. Growing tyre consumption from emerging countries is the key demand driver. 2) Expectations of potential supply shortage, as yield improvement in the rubber industry will not be sufficient to meet increased demand over the coming decade. Based on our estimates, the rubber market is expected to be in a balanced position over next couple years before a supply deficit from 2019 onwards when Olam’s estates come into full production.

We estimate Olam’s share of start-up losses to be US$2.0-2.1m over FY13-14, translating to 0.4% downside to our FY13-14F core earnings estimates. As rubber trees take between 5-7 years to mature and produce rubber, Olam will only see revenues from FY19. Based on our DCF valuation model, we see potential upside of S$0.09 per share.

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