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

Olam International - OCBC Investment 2015-12-14: Moving into animal feed business 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 

Acquires wheat milling and pasta manufacturing assets 

  • 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. 

Sees great potential 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. 

Moving downstream makes sense 

  • 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. 

Maintain HOLD with S$1.86 fair value 

  • 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