Monday, 31 August 2015

Olam International

UOBKayhian on 31 Aug 2015

FY15F PE (x): 17.4
FY16F PE (x): 15.9

Positive partnership. We are turning more positive on Olam with the entrance of Mitsubishi Corporation (MC) as its new strategic partner with a 20% stake at premium pricing. We are expecting medium-term value enhancement from this new partnership as: a) Olam ability to source and supply sustainable and certified ingredients for MC’s processed food division, and b) MC will be able to provide the processing capability and developed markets access for Olam. This is likely to lead to earnings enhancement and capex saving. Potential synergy. Both parties have different areas of strength in terms of capability and market accesses which both can leverage on in order to create cost and revenue synergies. For example: a) Olam will be able to penetrate into more developed markets with minimum capex by leveraging on MC’s existing processing plants, b) MC owns the world’s largest coffee plantation in Brazil while Olam is one of the top coffee traders, and c) Olam will be able to leverage on MC’s North America edible oil processing plants for its palm oil from Gabon. Management is not ready to share the value of the synergies yet, as they are pending the finalisation of the JV agreement within the next 120 days. Upgrade to BUY, with a higher target price of S$2.30 (previous: S$1.95), which is based on higher PE of 16.2x (10-year mean) on 2016F fully diluted EPS (up from 11.2x PE based on -1SD from mean PE). We like the stock’s medium-term prospects because: a) return of investor confidence with two reputable strategic shareholders, b) volume growth in medium term should be boosted by leveraging on MC’s strengths, and c) the business structuring that has been taking place since two years ago is showing positive results in terms of margins improvement.

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