Olam International Ltd
SINGAPORE
5 December 2008
OLAM SP Outperform
Stock price as of 03 Dec 08 S$ 0.8812-month target S$ 1.65Upside/downside % +87.5Valuation S$ 1.65
- PER
GICS sector food & drug retailingMarket cap S$m 1,50830-day avg turnover S$m 13.6Market cap US$m 989Number shares on issue m 1,713
Investment fundamentals
Year end 30 Jun 2008A 2009E 2010E 2011ETotal revenue m 8,152 8,731 9,626 11,272EBIT m 334 444 536 660EBIT Growth % 45.1 33.0 20.6 23.2Reported profit m 168 187 233 326Adjusted profit m 168 189 235 328EPS rep ¢ 10.5 10.9 13.6 19.0EPS rep growth % 52.2 4.4 24.4 40.0EPS adj ¢ 10.5 11.1 13.7 19.2EPS adj growth % 53.0 4.9 24.1 39.7PE rep x 8.4 8.0 6.5 4.6PE adj x 8.4 8.0 6.4 4.6Total DPS ¢ 2.5 2.8 3.4 4.8Total div yield % 2.8 3.1 3.9 5.4ROA % 7.1 7.2 8.4 9.3ROE % 31.3 26.6 26.7 29.6EV/EBITDA x 11.0 8.1 6.8 5.6Net debt/equity % 415.0 346.9 286.9 243.3Price/book x 2.2 1.9 1.6 1.2
OLAM SP rel All Singaporeperformance, & rec history
Source: Datastream, Macquarie Research, December2008 (all figures in SGD unless noted)
Analyst
Patrick Yau, CFA
65 6231 2835 patrick.yau@macquarie.com
Gaining from distress
Event
Olam plans to repurchase up to US$150m worth of its convertible bonds(maturing July 2013). US$300m of those CBs was issued in July 2008 (coupon1%, yield-to-maturity of 4.5%, 6.2% dilution assuming full conversion).
Impact
Depending on the size of the buyback, the company’s net gearing level couldbe lowered slightly on gains from the cancelled CBs. In any case, fallingprices (prices for Olam’s weighted basket of products have declined by 27%QoQ), imply a reduction in working capital needs for the next 1–2 quarters.Thus, nominal headline gearing levels could fall from the 2.7x the companyposted in September 2008. Its net gearing adjusted for hedged/pre-soldinventory receivables backed by letters of credit was 0.7x.
The CBs were quoted at 45.6% of face value as of 3 December, with a yield-to-put (July 2011) of about 38.4%. The yield-to-maturity of the CB (July 2013)is 23.2%. The tender offer opened at 9am on 4 December and will close atnoon on 5 December.
The company will likely draw down existing banking facilities (49% in unusedlines as of the end of September 2008) to finance the repurchase of these CBs.
Similar moves elsewhere: on 5 November, supply-chain manager NobleGroup (NOBL SP, S$0.94, OP, TP: S$1.35) repurchased US$20m worth of itssenior notes due November 2015. Similarly, Kuok Khoon Hong, the CEO ofedible oils processor/merchandiser Wilmar (WIL SP, S$2.60, OP, TP: S$3.00),personally bought, on 17 October, US$1.6m of Wilmar's convertible bondsdue in 2012 (at 65.25%).
Earnings revision
We expect net income gains depending on the size of the CB buyback.
Price catalyst
12-month price target: S$1.65 based on a PER methodology.
Catalyst: Volume growth of more than 16% from new products/segments.
Action and recommendation
We expect volume growth of 16% for Olam in FY6/09, helped by share gainsand expansion into new product areas.
Olam’s ability to scale up without relying on profits driven by commodity pricesremains a better risk/reward proposition than commodity growers.
Please refer to the important disclosures and analyst certification on inside back cover ofthis document, or on our website www.macquarie.com.au/research/disclosures.
Macquarie Research
Equities -
Flyer
Olam International Ltd5 December 2008 2
Analysis
Olam will repurchase up to US$150m worth of its convertible bonds (maturing July 2013).US$300m of those CBs was issued in July 2008 (coupon 1%, yield-to-maturity of 4.5%, 6.2%dilution assuming full conversion).
Depending on the size of the buyback, the company’s net gearing level could be lowered slightlyon gains from equity on the cancelled CBs. In any case, falling prices (prices for Olam’s weightedbasket of products have declined by 27% QoQ), imply a reduction in working capital needs for thenext 1–2 quarters. Thus, nominal headline gearing levels could fall from the 2.7x the companyposted in September 2008. Its net gearing adjusted for hedged/pre-sold inventory receivablesbacked by letters of credit was 0.7x.
The CBs were quoted at 45.6% of face value as of 3 December, with a yield-to-put (July 2011) ofabout 38.4%. The yield-to-maturity of the CB (July 2013) is 23.2%. The tender offer opened at9am on 4 December and will close at noon on 5 December.
The company will likely draw down existing banking facilities (49% in unused lines as of the end ofSeptember 2008) to finance the repurchase of these CBs.
Olam has previously reiterated that its panel of bankers is comfortable with the borrowingsprovided to the company ahead of what is now the key season for sourcing the commodities that itdeals with. In some sense, the decision to push ahead with this CB tender offer also implies thatOlam continues to receive strong support from its bankers.
We have previously stressed that, despite its high headline net gearing figures, the company’sdebt is mostly funding working capital needs rather than fixed investments or other long-durationassets. As a result, we do not anticipate the approach of a 'Minsky' moment, nor do we expectOlam to pay off debt by running non-current assets continuously at high utilisation rates in hopesof achieving positive cash generation. Instead, it operates on approximately 100-day+ cash cyclesand continuously repays debt as inventories are sold to customers and receivables are collected.
Funding for working capital: Olam's net debt of S$2.7bn (with 62% as short-term loans) at the end ofFY6/08 mainly funded working capital needs as 90% of its assets (about S$6.0bn) are working-capital related. Non-current assets amounted to S$0.6bn, or 10% of total assets. As noted, Olamcontinuously repays debt as inventories are sold to customers and receivables are collected (two-thirds of its receivables are supported by letters of credit). Olam's working capital needs in FY6/08were S$1.8bn in inventory and S$0.7bn in receivables. Only S$0.5bn is funded by Olam'spayables/creditors; it thus needs debt of about S$2bn to fund working capital needs. On our existingprojection for 16% growth in volumes for this year, there is room for the level of working capital debtto be lower than the S$2–2.1bn (similar to levels for FY6/08) that we expect for this year.
Similar moves elsewhere – on 5 November, supply-chain manager Noble Group (NOBL SP,S$0.94, OP, TP: S$1.35) repurchased US$20m of its senior notes due November 2015. Similarly,on 17 October, Kuok Khoon Hong, the CEO of edible oils processor/merchandiser Wilmar (WILSP, S$2.60, OP, TP: S$3.00) personally bought US$1.6m of Wilmar's convertible bonds due in2012 (at 65.25%).
Olam’s sponsor family, the Kelwaram Group, purchased 2m shares on 16 October (stake now26.8%); CEO Sunny Verghese added 1m shares 10 October (stake now 5.2%).
We still expect Olam to increase earnings at an average of 14% in the next two years as it boostsvolumes across its portfolio by about 16% YoY each year. Is there still room for Olam to expandmarket share? Likely yes because, outside of cashews and cocoa, its global volume share ismuch less than 10%
Macquarie Research
Equities -
Flyer
Olam International Ltd5 December 2008 3
Fig 1 Market share of agri-commodities traded volume
Olam market share <5% Olam market share between 5-10%Olam market share >10%
Rice CottonCocoaTimber CoffeeCashewsDairySugarSpiceAlmondsPeanutsSource: Company data, Macquarie Research, December 2008
Fig 2 Revenue by segment (S$m) Fig 3 FY6/09E: Revenue growth by segment (YoY%)
1,1691,2273,1893,3482,0272,4741,7271,64001,0002,0003,0004,0005,0006,0007,0008,0009,00010,00020082009FEdible Nuts, spices and pulsesConfectionery & beverage ingredientsFood staples and packaged foodsFibre and wood products(S$m)
-10-50510152025Edible Nuts,spices andpulsesConfectionery& beverageingredientsFood staplesand packagedfoodsFibre andwood productsTotal(YoY %)
Source: Company data, Macquarie Research, December 2008Source: Company data, Macquarie Research, December 2008
Fig 4 We expect volumes to grow for all divisionsother than fibre and wood products in FY6/09Fig 5 Expect overall FY6/09 volumes to grow by 16%to 5.7m tonnes
-30-20-1001020304050602003200420052006200720082009FEdible Nuts, spices and pulsesConfectionery & beverage ingredientsFood staples and packaged foodsFibre and wood products
(YoY %)
0.01.02.03.04.05.06.07.0TotalEdible Nuts,spices andpulsesConfectionery& beverageingredientsFood staplesand packagedfoodsFibre andwood products20082009F(mt)
Source:Company data, Macquarie Research, December 2008* Fibre & wood products in cubic metresSource: Company data, Macquarie Research, December 2008
Food demand is steady
. The USDA Foreign Agricultural Service data for the past 30 yearsindicate that, on average, there is fairly stable consumption in food items such as coffee in volumeterms. Global consumption of coffee has grown, on average, by 2% a year for the past 30 years.Even during periods of weak economic conditions, the contraction in consumption volumes, if any,seems small.
of 00
Olam Brokers' Report
1,820 Reads
Info and Rating
| Category: | Uncategorized. |
| Rating: | (1 Rating) |
| Upload Date: | 01/10/2009 |
| Copyright: | Attribution Non-commercial |
| Tags: |
Leave a Comment