Olam Research Report

by DBS Group (12 June)

OLAM'S long-term growth should continue to be within the agri-commodities space in non-perishable products, as the group expands its reach, both in upstream sourcing and downstream distribution, into adjacent products and geographies.

Even as Olam grows its current customer base of over 4,000-strong, it is expanding and extending its sourcing capabilities and also investing more in secondary processing and logistics to enhance its margins.

Olam also reassured investors that its increasing asset intensity is not merely to expand its portfolio of hard assets, but is being embarked upon to achieve a higher rate of return than current returns and that any future investments into upstream or secondary processing assets will be carefully and similarly assessed.

To help achieve these goals, we believe Olam will continue with its merger and acquisition strategy, which counts eight acquisitions or joint ventures over the last 15 months, to complement its organic growth engine.

Having raised S$300 million worth of equity in a preferential rights offering and US$300 million in convertible bonds (up to US$400 million at Olam's option), all of which will help to lower interest costs prior to deployment into capital investments, we believe that the group is now well poised to make further value accretive acquisitions.

We maintain our TP which is based on 30 times fully diluted FY 2009 earnings, predicated on a price/earnings to growth (PEG) ratio of 1, implying over 30 per cent upside from current levels.

We believe that the current share price level represents an attractive entry level for long-term investors and that with the substantial funding recently raised, acquisitions should act as catalysts for the stock to re-rate.

-Research Report by DBS Group (12 June)