Olam Research Report

by DMG & Partners (19 June)

ORGANIC and inorganic expansion: Olam, a leading global supply chain manager with operations in 56 countries, has recorded a historical three-year net profit CAGR of 31 per cent. This has come on the back of its very aggressive expansion programme, both organic and inorganic, as well as its focused approach to widen margins.

Olam has successfully raised contribution per ton traded: This is evident from all the four main segments. For 9M 2008, its gross contribution per ton from confectionery and beverage ingredients was 29 per cent higher than the FY2004 level, whilst fibre and wood products recorded a 54 per cent increase over FY2004.

Inorganic expansion could drive earnings further: Olam has entered into a joint venture with Wilmar to form Nauvu, which will invest in palm oil, natural rubber and sugar assets in Africa. The guidance is that Nauvu could generate earnings of US$35 million on a steady-state basis, with Olam's share at US$17.5 million.

The Queensland Cotton Holdings acquisition may not be earnings-accretive in the short term due to the drought in Australia, but there is huge earnings potential in the longer term.

But the market was concerned that the recent US$300 million convertible bond issue could dilute Olam's EPS going ahead: We agree that the dilution could range between 6.2 per cent and 8.3 per cent, depending on whether the US$100 million upsize option is exercised. We view this fund-raising exercise as positive, as it provides Olam with additional funds to expand its business.

Our DCF valuation works out to 28 times FY2009 EPS. Based on the three-year historical net profit CAGR of 31 per cent, this yields a price-to-earnings growth (PEG) of less than one time.

-Research Report by DMG & Partners (19 June)