Olam Research Report

by CIMB-GK Research (2 July)

ANOTHER joint venture with Wilmar to enter sweetener market: Olam has announced another 50:50 joint venture (JV) with Wilmar International, Olam Wilmar Investment Holdings (OWIH), which will be used to acquire a 20 per cent stake in PureCircle (listed on London's Alternative Investment Market or AIM), a producer of zero-calorie natural high-intensity sweetener Rebaudioside-A, an extract from the stevia plant, for US$106.2 million.

The JV will also be invited to have a representative on PureCircle's board of directors. In addition, OWIH and PureCircle have signed a memorandum of understanding to form a strategic partnership to develop and manage commercial stevia plantations in existing and new locations, assist in developing efficient commercial scale crude extraction facilities, and leverage on Wilmar and Olam's wide distribution network to accelerate PureCircle's sales growth.

The purchase price translates into £2.01 (S$5.44) per share, a 0.5 per cent premium over the June 30 traded price of £2. At £2.01, the shares are valued at an FY2007 historical PE of 115, and consensus estimated FY2008 PE of 22.4 and FY2009 PE of four. Based on consensus estimates for PureCircle, the net profit contribution to Olam is expected to be about US$7.75 million in FY2009 (June year-end).

PureCircle, which listed on AIM in December 2007 at £1.70, has a 95 per cent stake in China-based Ghanzhou Julong High Tech Food Industries, which has the necessary plantations and extraction facilities to allow PureCircle to cultivate at least 5,000 tonnes of high-purity stevia plants. In addition, PureCircle has a refining facility in Malaysia.

One of the key reasons for the investment is the potential development of stevia plantations in Africa and South America, where Olam and Wilmar, through their other JV, Nauvu Investments, have local market insight and experience in managing risks. Olam's management also thinks that the sweetener products complement Olam's existing agricultural-based product portfolio, with overlapping F&B-manufacturing customers.

The acquisition is in line with the company's stated intention of expanding upstream and expansion into complementary products. The profit contribution of around S$10.5 million in FY2009 accounts for 5.4 per cent of our current FY2009 net profit estimates, and 22 per cent of the profit growth that we have factored into our assumptions for FY2009. Our EPS estimates, recommendation and target price are under review after the transition of coverage.

-Research Report by CIMB-GK Research (2 July)