| Olam - MRE Targets 25% Upside |
| In a SGX announcement yesterday, commodity supplier Olam proposed an acquisition for US$250m. Prior to the announcement and broad market sell-down on Monday, Olam had been on a three-day winning streak, climbing 11%. Following the announcement, Olam rose 1.2% yesterday to emerge as the third leading index mover for the day. However, a further analysis by Macquarie Research Equities reveals further potential upside to the stock price… |
Chunky acquisition from Conagra Foods Yesterday, Olam proposed to acquire Conagra's Gilroy Foods & Flavors dehydrates and vegetable products business for US$250m. Olam will also enter into a long-term supply agreement to cater to Conagra Food's requirements.Analysing the impact of acquisition Macquarie Research Equities (MRE) provided their view on the proposed acquisition in a note published yesterday: Bulking up in dehydrates. Gilroy's product portfolio includes onions, garlic, capsicum and vegetables dehydrates as well as a proprietary onion seed program. Its plants are spread across six locations in the US. This transaction adds further bulk to Olam's dehydrates business and is amongst the largest that Olam has entered into in this space (the rest of its transactions in this space have been far less than US$100m). Synergies with its existing units. Olam already operates SK Foods (US tomatoes processing), DeFrancesco (US onions) and Key Foods (Chinese garlic). Olam expects that its combination of dehydrates units will generate annual revenue of US$300-350m i.e. ~5% of its annual revenue base. The US dehydrates market at near US$750m annually offers further room for Olam to grow. Margins to be enhanced. Olam's expects EBITDA margins for its dehydrates processing unit to be 14-15%, a few folds higher than the margins it sees for its supply chain business. This is in line with the expectation that investments into processing assets will have higher margins (and help compensate for the lower levels of leverage that can be deployed for these transactions). Earnings accretion, financing structure. While there was no disclosure on the earnings (nor revenue) for Gilroy - Olam states that this transaction will be earnings accretive from the first year of consolidation. This deal will be financed via internal accruals and debt. Contributions from acquisitions is the key catalyst. Olam has made significant acquisitions in the past three years, with nearly US$1b (incl Gilroy) invested in various ventures and acquisitions. MRE believes sustained growth in contributions from its various acquisitions will be the next key catalyst that will help rerate the stock. MRE reiterates rating and target price on Olam Contributions from acquisitions, together with an ability to access long-term capital and execute on attractive M&A deals, leads MRE to reiterate their Outperform rating on the stock. MRE’s 12-month target price of S$3.10 implies a 25x PER to reflect an expected growth rate of 20% per annum (ex one-time gains) over the next three years. ML's take: Olam continues on its acquisition trail..rain or shine and I think that is generally a good sign of a company that is clear on its direction and strategy of being the world leading integrated soft commodity player. while there will always be integration and execution risks on all M&A, I believe Olam's track record speaks for itself. Although this current acquisition may not have a significant impact in the short run, if you look at all its acquisitions in the past 3 years, Olam has made significant investment that is likely to bear fruits in the future. I never have doubt that Olam is another bluechip in the making....and I think Temasek also agrees on this. |
This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework. ML is a licensed stockbroker with one of Asia Leading Stock Broking firm. To contact him, please email: icewolfmike@gmail.com
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