Olam riding speculation ahead of Q1 earnings

Singapore-based commodity trading firm Olam International has been on four straight days of gains, with the market betting on upside from a potential deal on the horizon.

Source: Bloomberg

The company has revealed that it is currently in talks to “buy or sell assets” in response to a stock exchange query over a spike in its share price. However, it stressed that there was no certainty of any agreements materialising yet.

Olam’s share price has jumped over 8% in the past week to close at $2.25 on Wednesday. Its climb of over 48% on a year-to-date basis has also been impressive.

A potential asset sale would be in-line with Olam’s strategy to focus on shoring up its margins and improving cash flow. This was one of the key issues picked up in 2012 by short-seller Muddy Waters that caused Olam’s stock price to plunge.

Olam is scheduled to release its first-quarter results tomorrow, where the market consensus is for net income to more than double from the previous year to $97.6 million. This would be an improvement from Q4, when it posted a drop in net income at $31.8 million from $56.8 million a year earlier.

What investors should watch out for is that with the recent run up in stock prices, much of the upside looks to have been priced in. This would suggest a ‘buy on the rumour, sell on the news’ effect will play out.

In the short term, confirmation of any deal could prompt a pullback in Olam’s stock price as investors take profit. This presents an attractive entry to buy on dips for investors bullish on the company’s longer-term outlook.

On a weekly chart, Olam appears to have found a support level at around $2.06 – also a 50% Fibonacci retracement. The bias is now on the upside as it has broken above its 38.2% retracement level at $2.20, and looks to test $2.38 if there are further catalysts.

For now, all eyes will be on the results release and earnings call tomorrow for any further clues.


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