• 1H Op NPAT met 51% of FY forecast
• But overall outlook remains muted
• Lowers peg from 12.5x to 10x

Mitsubishi takes 20% stake in Olam Olam announced last Friday that Mitsubishi Corp (MIT) has become a long-term strategic investor in the company after buying a 20% stake via a “competitive bidding” process; this by subscribing for 332.7m new shares at S$2.75 each (12% of enlarged capital base) as well as buying 222m existing shares from the founding Chanrai family (8%). Olam will raise S$915m of gross proceeds, of which nearly S$914m will be used as capital to fund its growth and expand its businesses. Note the deal will dilute Temasek’s stake in Olam from 58% to 51.4%.

Strategic rationale

Management believes that MIT will help expand Olam’s access and presence in Japan to extract full value from its portfolio. For a start, the two parties will form a JV in Japan, where it will act as an importer and marketer of an agreed list of products (such as coffee, sesame, edible nuts, etc.) into Japan.
 

Olam also plans to build a platform for collaboration across geographies and products; this includes leveraging common source and destination networks, exchanging of farming best practices, and leveraging Japanese technology and best practices to improve efficiencies across Olam’s midstream assets. Last but not least, Olam stressed that its original strategic initiative to free up cashflow remains intact.

S$2.75 values Olam at 18x FY14 core EPS

The issue price of S$2.75/share is about 29% above the 12-month VWAP (also nearly 50% above 26 Aug’s VWAP – stock gained 13.4% on 27 Aug before being halted). We note that this prices Olam at 18x FY14 core EPS (pre-dilution), which in our view is quite pricey, given the stillmuted outlook for the commodity market in general. And at this point, we do not expect MIT to increase its stake further, hence the share price is unlikely to close the gap.

Maintain HOLD with S$1.88 fair value

While we are positive on the deal, we do not expect to see any immediate impact on the business, at least not in 2015; hence we opt to leave our forecasts unchanged for now. Maintain HOLD with an unchanged S$1.88 fair value (based on 10x blended FY15/FY16F EPS).

Source: OCBC Research - 31 Aug 2015