Excerpts from analyst's report

DBS Vickers analyst:
Mervin SONG, CFA 
  
       Acquires Archer Daniels Midland Company’s global cocoa business for EV of US$1.3bn (S$1.7bn) 
       Olam is now the third largest cocoa processor with exposure to growing US$16bn mid-stream market 
       11-15% accretion to FY16-18F core earnings 
       Maintain BUY, TP revised to S$3.15 

  
Acquires ADM’s cocoa business. Olam announced the acquisition of Archer Daniels Midland Company’s global cocoa business for US$1.3bn. This implies an EV/EBITDA multiple of 9.5x (based on 5 year average adj. EBITDA) and prospective EV/EBITDA of 6.5-7.2x (based on FY18 EBITDA after full integration).

The valuation compares favorably to the 14.3-23.5x EV/EBITDA multiple Petra Food achieved when it sold its cocoa ingredients business to Barry Callebaut in 2012. Olam is also acquiring the processing assets at a 24-39% discount to replacement cost.
 
  
Strategic expansion of cocoa platform. Post this transaction, Olam will be among the top 3 global cocoa processors with a 16% global market share in the US$16bn processing market, where demand growth is expected to accelerate from 3% p.a. to 3.4-4.3% in the coming decade.

In addition, as a integrated player with substantial presence in the sourcing and now the processing segment of the cocoa value chain, Olam should derive higher profits through greater scale and better procurement. This should translate to 11-15% accretion to FY16-18F core profits, with an uplift in medium term cashflows and ROEs (0.8-1.3%) leading us to also revise our DCF-based TP to S$3.15 from S$3.10.
 


olam_dbs12.14Source: DBSMaintain BUY. While we are positive on the transaction given the boost to earnings, ROE and cashflow in the medium term, we are disappointed over a short term spike in gearing and the delay in Olam achieving positive FCFF within a year due to the large investment. 

Nevertheless, following the recent correction, these concerns have been priced in our view. With Olam trading at a 13% discount to Temasek’s S$2.23 general offer and on a 12-month rolling forward PE multiple of 10x which is slightly below -1.5 SD PE of 10.4x, we believe Olam is undervalued based on its 30% 3-year earnings CAGR. Maintain BUY with a TP of S$3.15.
 

 

You may also be interested in:


You have no rights to post comments

Counter NameLastChange
AEM Holdings2.3200.030
Best World2.450-0.010
Boustead Singapore0.9500.005
Broadway Ind0.1270.002
China Aviation Oil (S)0.9100.005
China Sunsine0.4100.010
ComfortDelGro1.4800.030
Delfi Limited0.895-
Food Empire1.2900.010
Fortress Minerals0.305-
Geo Energy Res0.3100.010
Hong Leong Finance2.4900.010
Hongkong Land (USD)2.9200.090
InnoTek0.5250.005
ISDN Holdings0.295-0.005
ISOTeam0.042-
IX Biopharma0.0430.003
KSH Holdings0.250-0.005
Leader Env0.050-
Ley Choon0.043-0.001
Marco Polo Marine0.0680.001
Mermaid Maritime0.1390.003
Nordic Group0.3300.020
Oxley Holdings0.089-
REX International0.137-0.001
Riverstone0.8050.015
Southern Alliance Mining0.4500.005
Straco Corp.0.485-0.010
Sunpower Group0.205-
The Trendlines0.0700.001
Totm Technologies0.022-
Uni-Asia Group0.8350.010
Wilmar Intl3.4100.010
Yangzijiang Shipbldg1.7500.010
 

We have 749 guests and no members online

rss_2 NextInsight - Latest News