UOBKayhian on 17 Dec 2014
FY15F PE (x): 14.1
FY16F PE (x): 12.2
Expansion focuses on prioritised platforms. Olam recent acquisitions of McCleskey Mills Inc and Archer Daniels Midland Company’s (ADM) cocoa business for US$1.47b will push Olam’s strategic plan objective to see positive cash flows from FY15 to FY16 and gearing for FY15 to be at 2.14x (ie above its strategic plan objective of ≤ 2x). Both acquisitions will strengthen Olam’s presence and market positioning in the areas deemed to be prioritised platforms – peanuts (from the acquisition of McCleskey Mills Inc., the third-largest US peanut sheller) and cocoa (from the acquisition of ADM). Management mentioned that Olam is unlikely to undertake any further substantial acquisitions in FY15 after these two transactions.
Maintain HOLD and target price of S$2.35, pegged to12.7x FY15F PE (1SD below 5- year mean). Entry price is S$2.10. Although the share price dropped below our entry price, it is still not a good entry time yet as the volatility in the commodities market is relatively high, given the sharp decline in crude oil prices while commodity prices historically fall when the US dollar strengthens. We may see higher earnings volatility in the coming 1-2 quarters.
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