Published June 3, 2009

Analysts' upgrades bolster Olam shares

Improved gearing, prospects of earnings-accretive acquisitions cited

By CHEW XIANG

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OLAM International jumped as much as 10 per cent yesterday as analysts upgraded the stock and dramatically revised their target prices.

More muscle: Olam is placing out a 13.8% stake to Temasek at $1.60 a share, giving the group additional support for its expansion plans. Olam shares rose 2.8% yesterday, after gaining as much as 10%

This followed an 11 per cent gain on Monday after the commodities supplier said it was placing out a 13.8 per cent stake to Temasek Holdings at $1.60 a share.

At one point yesterday morning Olam traded as high as $2.38 a share, before closing the day at $2.22, up 6 cents or 2.8 per cent.

Analysts from RBS, Credit Suisse and CIMB upgraded their calls on the stock, citing improved gearing and the possibility of earnings-accretive acquisitions.

The average target prices placed on Olam by seven research houses tracked by Bloomberg jumped to $2.37, from $1.68 last Friday. RBS analyst Nirgunan Tiruchelvam was the most bullish, upgrading the stock from a 'sell' to a 'buy' with a target price of $2.63, up from just 82 cents.

Mr Tiruchelvam said Olam's net gearing, at a level four times its peer group average, had begun to cause concern but the money now raised will improve gearing from 3.4x to 1.8x. Interest coverage ratio will improve, easing coverage pressure and interest expenses.

'With this move, net gearing will fall to its lowest since the company's listing. Temasek's investment will place Olam in line with the rest of the sector,' he said.

JP Morgan analyst Christopher Gee, who has an 'overweight' on the stock with a one-year target of $2.60, said Olam was still trading below its historical earnings multiple, despite the potential dilution from the Temasek deal.

'Any accretion from new acquisitions or investments would boost the group's medium-to-long term (earnings per share) growth prospects and could help the stock to regain its high-growth earnings multiples,' Mr Gee noted.

The key risks remain a possible sharp decline in demand for agricultural commodities, Olam's key focus, an increase in protectionism, prolonged disruption to credit markets and a reversal in investor appetite for higher beta, higher growth stocks, Mr Gee said.

OCBC Research was the sole house that reduced its target price, from $2.06 to $2.01 and downgraded the stock from 'buy' to 'hold'.

Analyst Lee Wen Ching said: 'We view Temasek's strategic investment in Olam positively as it could serve as a platform for future growth opportunities. In addition, we believe that Temasek's financial muscle could support the group's expansion plans should the need arise.' However, the stock's sharp appreciation on Monday prompted the downgrade, Ms Lee said.