Olam: Equity fund raising to strengthen growth (DMG)

(BUY, S$2.61, TP S$3.70)

More shares, but interest expense to be lower than our earlier expectations. Since Olam’s announcement of its S$740m fund raising two weeks ago, its share price has fallen 7% on fears that EPS will be diluted. Whilst we recognize the issue of the additional 286m new shares (comprising both placement and rights), which accounts for 11.8% of the enlarged capital of Olam, will lower EPS, this will be mitigated by lower interest expenses (compared with our earlier forecasts) and potential for stronger growth via acquisitions going forward. We maintain BUY recommendation with a DCF-derived target price of S$3.70. We lower our FY13 EPS forecast by 6.7% to 22.2S¢:

• We raised our FY12 and FY13 net profit forecasts by 5.1% and 6.6% respectively. In steady state, our FY13 interest expense is lowered by S$39m to S$359m, which is the key contributor to net profit rise of S$34m to S$540m.

• The issue of additional 286m new shares (comprising both placement and rights), which accounts for 11.8% of the enlarged capital of Olam.

Equity fund raising positive for long term growth. We believe the equity fund raising will provide Olam with more acquisition potential going forward, a positive for earnings in FY14 and beyond. We also estimate that Olam’s net gearing will fall to 1.49x at end FY12 from end FY10’s 1.90x, which takes into account the completion of all three components of the EFR. We raised our growth rate forecast (from now till 2016) to 29% (from 28% previously). Our 3-stage DCFderived target price of S$3.70 remains unchanged.