Olam - Attractive at Current Levels

kimeng

Publish date: Tue, 19 Jun 2012, 09:55 AM

Warrants Highlight

Olam - Attractive at Current Levels

Code	Name	Type	Expiry	Exercise Price
QF2W	OLAM MB eCW121005	Call	05-Oct-12	2.00

Since closing at a three year low of $1.53 the start of this month, commodity supplier Olam International has quickly turned things around, rebounding 23% in just two weeks. The swift bounce has come on the back of a series of announcements, from acquisitions to share buybacks.

Its latest acquisition was announced last Thursday on June 7: Kayass Enterprises, a mid/downstream diary and juice beverage business in Nigeria for US$66.5m.

To this, Macquarie Equities Research (MER)released a note on the same day, commenting that they felt marginally positive about the deal, given Olam’s familiarity in this space.

A closer look at the deal
The deal consists of two relatively new plants and three consumer brands. The assets in consideration include a diary powder packing facility and a 2-yr old beverage manufacturing facility of 200K litres/day capacity. These support Kayass’s consumer businesses in diary powder, diary and juice beverages (brands include “Blue Boat”, “Nature’s Fresh” and “Yo-Jus”).

Acquisition expected to add steady state revenues of c.US$120m and EBITDA of c.US$24m by FY2016. Olam expects to achieve a 10% market share of the diary products and beverage business in West Africa (this is estimated to be c.US$1.2bn) by ramping up current underutilised factory capacity. The reason for the low utilisation rate is the previous owner lacked sufficient capital to scale up operations.

Overall, little execution risk, deal to be earnings-accretive from FY2014 (Jun 2014). MER sees little execution risk here and think that the equity internal rate of return target of 35% looks achievable, given that Olam is already well entrenched in the packaged foods sector in Nigeria with brands like “Tasty Tom” and “OK Foods”.

MER therefore reiterates its Outperform rating on the stock as well as its 12-month price target of $2.40. MER believes that Olam shares offer attractive value at current price levels and should reward patient investors as new investments start to contribute. Its price catalyst is likely to come at the end of August, when Olam reports its June quarter. MER believes Olam’s underlying growth story should be visible again from the September quarter (1Q12), which is reported in November.

Singapore Market Wrap

Moderate Gains after Greek elections

As with most indices in Asia, the STI rose after the Greek elections results yesterday morning. It gained 0.5% day-on-day (dod) to 2,824.22. Keppel corp calls (QF0W), Sembcorp Marine calls (P1FW) and Sakari calls (QP1W) were among the most actively traded single stock warrants, each with more than 4mn changing hands.

Call STI 2750MBeCW120831 (QP9W) exercise level 2,750.*
Put STI 2850MBePW120831 (QE9W) exercise level 2,850.*

Call KepCorp MBeCW121001 (QF0W) exercise price $10.50.*
Call SembMar MBeCW120905 (P1FW) exercise price $5.058.*
Call SakariMBeCW121203 (QP1W) exercise price $1.65.*

Sakari rally continues
After rallying 4.6% last week, Sakari Resources rose 4.7% again yesterday to close at $1.32. More than 4mn traded in the stock, which is around twice its average daily trading volume last week. The stock was previously sold off due to the uncertainty on Indonesian export coal taxes.

Call warrant SakariMBeCW121203 (QP1W) exercise price $1.65.*

CapitaLand and Yanlord go separate ways
CapitaLand rallied 1.9% to $2.72 yesterday, while Yanlord (-1.7% dod, $1.145) took a breather after a 6-day rally. Reuters reported that China's home prices continued to fall in May, but at a slower pace. The government reaffirmed that it would keep property tightening measures in place for now.

Call warrant CapitalaMBeCW120904 (QC5W) exercise price $2.979.*
Put warrant CapitalaMBePW121203 (QR6W) exercise price $2.60.*

Call warrant Yanlord MBeCW120801 (O8XW) exercise price $1.15.*
Call warrant Yanlord MBeCW121002 (P8LW) exercise price $1.40.*

Overnight Market Wrap

Greek elections fail to excite markets

US indices ended mixed yesterday with the S&P500 rising 0.1% to 1,344.78 while the Dow fell 0.2% to 12,741.82. The Euro rose above 1.270 after the results yesterday morning but drifted lower throughout the day towards 1.260.

Spanish banks' bad debts rose to a 18-year high in April, causing its borrowing costs to surge above 7% yesterday. The Spanish central bank announced that 8.72% of loans held by banks were more than 3 months overdue.

Overnight Markets

Indices	Last	Change
STI	2824.22	0.5%
HSI	19427.81	1.0%
DJIA	12741.82	-0.2%
S&P 500	1344.78	0.1%
Nasdaq	2895.33	0.8%

Olam Intl (O32)

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