OLAM INTERNATIONAL LIMITED
O32.SI
Olam International - Waiting For Fulfilment Of Promises
- Acquires Nigerian flour mills and pasta manufacturing plants for US$275m
- Potential 3-16% uplift to FY16-18F core earnings
- Strengthens Olam’s number two position in Nigerian wheat milling
Investors on the sidelines for now.
- We maintain our HOLD call and TP of S$2.01.
- We believe investors will continue to remain on the sidelines until Olam delivers on its positive free cash flow targets by 2016 and successfully integrates its recent US$1.2bn acquisition of ADM Cocoa.
Significant medium term upside on successful execution.
- While we are cautious near term, there is significant upside to Olam’s earnings over the medium term if the company successfully executes on its plans.
- Currently, Olam has S$3.2bn worth of immature assets which, on maturity, could generate an additional c.S$380m of EBITDA.
- In addition, a successful integration of ADM Cocoa should deliver US$35-40m worth of synergies. This is on top of any incremental earnings from new investment opportunities Olam has with its new partner, Mitsubishi Corporation, which recently took a 20% interest in the group.
- All these factors may enable Olam’s share price to re-rate closer to S$2.23 and S$2.75, price levels at which Temasek and Mitsubishi acquired their most recent equity interests in Olam.
Negative sentiment and low free float.
- Given the negative sentiment surrounding other commodity trading companies such as Glencore and Noble Group, we believe investors may continue to shun the sector and/or Olam in the near term. This is especially in light of Olam’s small free float of c.17.5%.
Valuation:
- Given weaker-than-expected results, we recently cut our FY15- 17F core earnings by 9-11% and lowered our TP to S$2.01 from S$2.14.
- Our TP is an average of our PE valuation (S$1.97, pegged to -1SD forward PE of 13.5x) and DCF valuation (S$2.01).
- Given limited near-term re-rating catalysts, we maintain our HOLD recommendation.
Key Risks to Our View:
- The key risk to our neutral stance is earlier-than-expected delivery of synergies from the ADM Cocoa acquisition and/or stronger earnings on the back of a faster turnaround of the dairy and packaged food businesses.
Mervin Song CFA
DBS Vickers
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http://www.dbsvickers.com/
2016-01-12
DBS Vickers
SGX Stock
Analyst Report
2.01
Same
2.01
