- Paying USD1.3b or 9.5x EV/EBITDA for cocoa business of ADM.
- Expect synergies but also more volatile earnings.
- Adjust EPS by -2% to +17%. TP cut to SGD2.07 from SGD2.52, now on 11x FY15E EPS, from 13x. Maintain HOLD for lack of near-term catalysts. Prefer Wilmar in sector.
Olam is acquiring the cocoa business of Archer Daniels Midland (ADM) for USD1.3b EV. It will take over eight factories, exindustrial chocolates, with 600,000 MT of processing capacity, 10 warehouses, ADM’s deZaan®, Joanes® and UNICAO® brands, a global consumer franchise and an experienced management. The transaction is valued at 9.5x historical EV/EBITDA and will be funded by cash and debt. Olam’s net gearing could rise from 1.85x to 2.14x upon deal completion.
What’s Our View
Olam has footprints in all major cocoa origins except Brazil and is No. 1 in cocoa-bean sourcing. Cocoa is a niche commodity where it has competitive advantages and it is keen to develop this business. ADM’s cocoa EBITDA averaged USD137m pa in the last five years. Olam expects its new assets to contribute 86-95% or USD180-200m to its Confectionery & Beverage Ingredients EBITDA and 25% to group PATMI by FY6/18E when the business reaches a steady state. We adjust FY6/15E-17E EPS by -2% to +17% for acquisition costs and contributions. While there could be synergies from a combination of Olam’s sourcing ability and ADM’s project development, R&D and processing strength, ADM’s cocoa processing margins have been highly lumpy in recent years owing to industry overcapacity. As such, we expect Olam’s earnings to become more volatile. For this, we lower our target from 13x PER, its 5-year average, to 11x, -1SD. Accordingly, we cut our TP to SGD2.07 from SGD2.52. Maintain HOLD for lack of near-term catalysts.
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