OLAM INTERNATIONAL LIMITED
O32.SI
Backed by the rising sun
- Mitsubishi Corp. to take a 20% stake at S$2.75 per share.
- New partnership to drive new business opportunities and strengthen Olam’s balance sheet.
- FY15-17F EPS cut by 1-8% due to impact of new shares.
- Maintain HOLD, TP raised to S$2.14.
New strategic partnership.
- Olam has announced a strategic partnership with Mitsubishi Corporation (MC). This will involve Olam issuing 332.73m new shares (c.12% of the enlarged share capital) to MC at S$2.75 per share, which is at a 44% premium to the pre- announcement closing price of S$1.91. At S$2.75, the implied FY16F PE stands at 16.7x, close to Olam’s average PE multiple of 16x. The S$915m raised will be used for opportunistic acquisitions and other growth initiatives, but not for the US$1.3bn ADM Cocoa acquisition.
- MC will also acquire c.22m secondary shares from Kewalram Chanrai Group, which is Olam’s second largest shareholder, at S$2.75 per share.
- Following the two transactions, Temasek will remain as Olam’s major shareholder with a 51.4% stake, down from 58.4%. MC will have a 20% stake, nominate two members to Olam’s board and have its managers join Olam’s global management team.
Positive transaction.
- We are positive on the partnership as it presents new business opportunities for Olam, allowing it to tap on MC’s global distribution network, expertise in areas such as rice farming and milling, as well as potentially distributing MC’s package food brands in Africa. In the near term, a JV will be established in Japan to act as an importer and marketer of various agricultural products.
- Olam’s balance sheet will also be strengthened with net debt/equity as at end-Dec15 projected to drop from 2.3x to 1.7x. However, we cut our FY15-17F EPS by 1-8% on account of the placement shares.
Maintain HOLD.
- While the partnership with MC increases confidence over the value of Olam’s assets and management’s ability to deliver on its return and cash flow targets, we believe investors will remain hesitant to re-rate the company, given nervousness over the integration of the ADM Cocoa acquisition and delay in generating positive free cash flows until next year. Thus, we maintain our HOLD call with a slightly higher TP of S$2.14.
- Our TP is an average of our PE valuation (S$2.14, pegged to -1SD PE of 13x vs. -1.5SD previously to account for the high implied PE from the share placement to MC) and DCF valuation (S$2.15).
Mervin SONG CFA | http://www.dbsvickers.com/ DBS Securities 2015-08-31
2.14
Up
1.97
