OLAM International

Citi Investment Research on  11 June 2012

OLAM has commenced a share buyback programme: Last Friday, Olam started a share buyback programme with 3.1 million shares purchased ($5.2 million worth). This comes under its share buyback mandate renewed at its last AGM October 2011.

Olam has shareholders approval to purchase up to 10 per cent of total number of issued shares (up to about 244 million shares) at a maximum price of 105 per cent of the average closing price of the last five market days at the time of acquisition.

This is the first time Olam has conducted a share buyback exercise.

Global financial crisis (GFC) vs now: Olam's price-to-equity (P/E) valuation for its equity is now at similar lows to those seen during the GFC, in part due to the various hits that Olam (and the sector) has encountered in the past few quarters as well as the increased gestation period on some of its fixed-asset linked investments (ie it will take longer for growth to come from investments such as its US$1.3 billion fertiliser project in Gabon).

In contrast, Olam's debt is trading close to par vs large 40-50 per cent discounts seen during the GFC. Olam repurchased debt in H1 2009 during the GFC period, which helped mark the bottom for equity valuations then.

This cycle, while it is watching the trading yields on its debt carefully, it believes that it is better off investing in operational projects versus debt buybacks at current values.

More options this cycle: Olam has more options this cycle as it is more lowly geared this cycle, with adjusted net gearing of 0.4 times (or 1.9 times nominal net debt/equity) which leaves it room to fund further debt or equity buybacks as it had raised $740 million in new equity in June 2011.

Its current gearing level of 0.4 times is also favourable when compared against the 0.7 times in adjusted net gearing at end FY2008 during the GFC period.

Which is more powerful: Debt or equity buybacks?

Equity investors likely prefer debt buybacks at substantial discount as the reduced debt burden is seen as a tangible benefit and the benefits also flow through the P&L, while the opinion on the benefit of an equity buyback can be diverse.

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