Olam International - OCBC Investment 2016-01-12: Expands grains operations in Nigeria

OLAM INTERNATIONAL LIMITED O32.SI

Olam International - Expands grains operations in Nigeria

 Enterprise value of US$275m

 Earnings accretive from FY17

 Still early days to change forecast

Olam just announced that it has acquired Amber Foods Limited which owns the wheat milling and pasta manufacturing assets of the BUA Group in Nigeria; this for an enterprise value of US$275m, which it would finance using a mixture of internal funds and debt.

These assets include two wheat mills and a pasta factory in Lagos; a nonoperating mill in Kano; and a wheat mill and a pasta manufacturing plant under construction in Port Harcourt.
According to Olam, the move will strengthen its position as the number two wheat miller by sales volume and make it a leading pasta player in Nigeria.

Olam believes that Nigeria is a high-growth milling market with volumes expected to reach 5m metric tonnes in 2020 as population growth and urbanization increase the demand for wheatbased products.
It notes that the size of the Nigerian flour market is in excess of US$2.0b, growing at 3.5%/year while the pasta market is growing at 8.0%/year.
Last but not least, it adds that the move will provide access to strategically located, port-based assets that are increasingly scarce due to lack of undeveloped land at the port.
Management further believes that the acquisition will be earnings accretive from the first year after consolidation; it is also guiding for the acquired business to generate an EBITDA to invested capital of 13-16% when it reaches steady-state in 2018.

As before, moving downstream makes sense as it will create “demand” for its upstream origination business. And by going the integrated route, we believe that Olam can also capture more margins; this as it expects to derive cost savings from larger scale, better utilization, and combined purchasing power.
Recall that Olam has a very food staples and packaged foods segment – it generated about 36% of overall group revenue in FY14 – and was the largest revenue contributor as well.

However, any sizable benefits are likely to accrue from FY17 onwards at the earliest; hence we keep our forecasts unchanged for now.
Maintain HOLD with an unchanged S$1.86 fair value.

Carey Wong CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-01-12

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 1.86 Same 1.86