Published September 23, 2009

Analysts like the look of Olam's new orchard

But they note too the company faces fresh price and weather risks

By CHEW XIANG

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ANALYSTS say that Olam International's A$128 million (S$156 million) purchase of an 8,000 hectare almond orchard in Australia is a 'steal' but caution that the deal exposes the company to new price and weather risks.

Olam, a commodities supplier, announced the acquisition on Friday, saying that the purchase was part of its mid-term strategy to cherry pick excess returns from upstream opportunities. The acquisition is expected to be completed by year-end and could generate 3.5 times price earnings at steady state when the orchard matures in 2014.

The company's core business is supply chain management but the orchard - bought from Timbercorp, which is now being liquidated - would make Olam one of the top three almond producers in the world, the company said. The price includes permanent water rights to 40,825 megalitres of water, about half the orchard's requirements.

Analysts generally maintained their calls and target price on the company, but noted that the deal was very attractively priced.

JP Morgan's Ajay Mirchandani said that the implied price for the plantation was A$40-60 million versus its estimated replacement cost of A$400 million. 'While we are slightly wary of the company's transition to upstream given potential weather and execution risks along with concerns about a long gestation period, we do see the current deal as a 'steal',' he said.

'This is the catalyst that we expect to help rerate the stock. We now expect it to rerate to a 25x PER, ie, S$3.10.' - Macquarie's Patrick Yau

Ben Santoso, an analyst at DBS Vickers, estimated the value of the orchard at A$233 million, which could translate to five cents a share in additional value to Olam, given the low acquisition price. 'Due to the young age of the trees, we expect yields to remain below full potential until 2013, by which time we estimate the orchard to be earnings accretive by S$58 million, excluding biological asset gains,' he said in a report.

Macquarie analyst Patrick Yau said that the deal showed that Olam - after more than 10 smaller acquisitions - has now started to execute relatively large-scale M&A deals, after raising US$1.4 billion in fresh equity, convertible bonds and long term debt.

Olam recently sold US$300 million of new shares to Temasek Holdings, priced US$400 million of convertible bonds and secured US$540 million in long-term debt. 'This is the catalyst that we expect to help rerate the stock. We now expect it to rerate to a 25x PER, ie, S$3.10,' said Mr Yau in a report.

But analysts cautioned that the acquisition brought with it fresh risks. JP Morgan's Mr Mirchandani said that unlike its current trading business, 'the earnings of such upstream assets would be highly sensitive to price'. Another risk is that despite the acquisition of permanent water rights, Australia is still facing drought conditions, which could affect future harvests.

Leng Seng Choon of DMG said that Olam could net pre-tax profit of A$57 million at steady state but said that this would depend on the average selling price, exposing the company to future supply and demand dynamics in the almonds industry.

Olam closed at $2.39 yesterday, up seven cents or 3 per cent.