Olam International (DBSVickers)

HOLD S$2.73 STI : 3,115.95
(Downgrade from Buy)
Price Target : 12-Month S$ 3.00 (Prev S$ 3.30)
Reason for Report : Capital raising announcement
Potential Catalyst: Financial closing to Gabon urea project

Short term dilution
• Olam to raise S$740m in capital to implement strategic plan initially announced in 2009
• Proceeds to fund future acquisition and capex
• FY11-13F EPS revised down by 0.4% to 16.5%
• Rating cut to Hold given limited upside to revised S$3.00 TP

Raising net S$731.8m. Olam has announced a S$740m capital raising exercise, comprising S$245.5m placement at S$2.60 per share (c.94.4m shares) to institutional investors, S$249.1m as a 1 for 22 non renounceable preferential offering at S$2.56 per share (c.97.3m shares) and S$245.5m additional subscription at S$2.60 per share by Breedens Investments Pte Ltd (wholly-owned subsidiary of Temasek Holdings (Private) Limited) representing c.94.4m new shares. Net of capital raising fees, Olam would receive S$731.8m.

Proceeds to fund growth. Approximately 50% of the capital raised (or c.S$365.9m) will be used for future acquisitions, 30% (c.S$219.5m) for capital expenditure and 20% (c.S$146.4m) for general purposes. We note the company has c.US$362m (c.$445m) in capex/equity contributions to make over the coming years from previously announced projects (see page four of this report).

Adjust FY11-13F EPS down by 0.4% to 16.5%. While we are positive on the group’s stronger balance sheet post capital raising, we are slightly negative on the dilution impact. After accounting for the new shares from the capital raising, capex and earnings contribution from the Gabon palm plantation, Nigerian sugar refinery and Cote D’Ivoire cocoa processing projects and removal of previously assumed CB3 conversion, we have revised our FY11-13F lower by 0.4% to 16.5%. FY12 net gearing increases to 0.92x from 0.81x as a result.

Rating cut to Hold. We adjusted our TP to S$3.00 from S$3.30 due to an increase in number of issued shares and lower FY12F earnings due to removal of assumed CB3 conversion. With limited upside to our revised TP, we cut Olam’s rating to a Hold. Note than we have not imputed the Gabon urea project in our projections. A financial closing for this could be a catalyst for a re-rating; based on the enlarged number of shares, this could add S$0.46/share to our fair value

Olam raises new equity
There are three components to Olam’s capital raising
1. Placement shares – Private placement of 94,408,000 shares at issue price of S$2.60 to institutional and other investors. Gross proceeds of S$245.5m

2. Preferential offering - Pro-rata and non-renounceable preferential offering of 97,292,951 shares at issue price of S$2.56 based on one preferential offering shares for every 22 existing shares. Gross proceeds of S$249.1m

3. Proposed subscription – Issue of 94,408,000 shares at issue price of S$2.60 to Breedens Investments Pte Ltd (wholly-owned subsidiary of Temasek Holdings (Private) Limited). Gross proceeds of S$245.5m

Olam expects net proceeds of S$486.3m from the placement shares and preferential offering with a further S$245.5m net proceeds from the placement to Temasek. Total net proceeds from the capital raising will be S$731.8m.

Details of the equity raising
Olam shares will trade on a “cum” basis on the SGX up to 5pm on 10 June 2011 prior to commencement of the preferential offering. Placement shares will not be entitled to participate in the preferential offering. The placement to Temasek is subjected to shareholder approval at an extraordinary general meeting (EGM). Kewalram Singapore Limited (major shareholder), Sunny Verghese (CEO) and Shekhar Anatharaman and Sridhar Krishan (Exceutive Directors) will be voting in favour of the issue of shares to Temasek.

Assuming approval by shareholders, post the capital raising, Temasek’s shareholding will increase from 12.95% to approximately 16.09%, based on our estimates.

Earning changes
We have made the following changes to our earnings forecasts:

1. To include earnings and capital expenditure requirements from Phase I of the Gabon oil palm plantations. We estimate the project to earn S$3.1m in FY15 rising to S$33.8m in FY18. Olam’s FY11-13 profitability is impacted from higher net interest payments from an increase in capital expenditure.

2. To include capital expenditure requirements for the Nigerian sugar refinery project.

3. To include capital expenditure requirements for the Cote D’Ivore cocoa processing facility.

4. To remove previously assumed conversion of CB3.

The net impact from these changes are downward revisions to our FY11, FY12 and FY13 EPS by 0.4%, 13.0% and 16.5% respectively.

Net gearing for FY11 and FY12 increases to 1.15x and 0.92x respectively from prior forecast of 0.95x and 0.81x mainly due to removal of previously assumed CB3 conversion.

A summary of the changes we have made are provided on the next page.

Downgrade to Hold
While we are cognizant that Olam requires capital to fund its value accretive growth plans in particular projects such as the Gabon oil palm plantation, sugar refinery in Nigeria, processing facility in Cote D’Ivoire as well as their equity share of the Gabon urea project (financial close expected in September 2011), we reduce our TP to S$3.00 from S$3.30 on the account of an increase in number of shares. Given limited upside to our revised TP, we downgrade the stock to a Hold.

There is potential upside if Olam and its partners achieve financial close on the Gabon urea project. We have not imputed this project in our numbers. Our valuation of the project stands at S$0.46 per share.