Olam International

Kim Eng on 19 Aug

• Sanyo Foods taking 25% stake in Olam’s packaged food division for USD187.5m.
• Improved cash flow but limited impact on balance sheet.
• Maintain HOLD. Top sector pick is Wilmar. TP higher at SGD2.35 from SGD1.57, after rollover to 13x FY6/15E P/E (from 11x FY6/14E).

What’s New
Olam announced that Sanyo Foods, Japan’s third-largest instant- noodle maker, is taking a 25% stake in its packaged food division for USD187.5m. Valuation is 2.1x FY6/13 sales and 2.0x FY6/13 P/BV. The transaction is expected to be completed by year-end. Olam expects net cash inflow of USD167.5m (less USD20m that Sanyo paid for 25.5% of its noodle business in 2013) and a net gain of USD80.8m. The price could increase to USD212.5m if the division meets specific performance milestones in FY6/15E.

What’s Our View
Generally positive. Packaged foods are not a big part of Olam’s business, at only 2% of its FY6/13 revenue. The USD167.5m net cash inflow will improve its FCF meaningfully, though the impact on its balance sheet should be limited. Net gearing will only improve by 5bps from 184% to 179% in FY6/15E, in our estimation. Longer term, its partnership with Sanyo Foods could be an important strategic move. By leveraging Sanyo’s expertise in technology and leadership in emerging markets, Olam’s consumer business might be able to expand faster. It might be able to explore new opportunities in sub-Saharan Africa
That said, maintain HOLD as we think the positives have been priced in. We raise TP to SGD2.35 from SGD1.57, now pegged to 13x FY6/15E P/E, its average since 2009 (from 11x FY6/14E). This factors in strategic changes introduced by management in recent months. Our TP implies 1.3x FY6/15E P/BV.