Event:
Olam’s share price has shown weakness since the company announced its equity-raising exercise on 7 June. Though we view the exercise in a negative light, we believe the share price correction is overdone and see a good entry opportunity. With the strong likelihood of positive M&A newsflow, we maintain our BUY recommendation but lower our target price from $4.10 to $3.38.
Our View We view Olam’s recent equity-raising exercise in a negative light because of the high discount offered, which we deem to be dilutive to minority shareholders. The placement to institutional investors and Temasek constituted a discount of 8.4% (compared to the 5% discount Noble offered in its March exercise). And this is not taking into account the fact that the stock was already languishing amid market concerns in the 1-2 weeks leading up to the exercise.
Furthermore, the company has raised a substantial sum of money from the market in recent years. There were a total of five equity-linked exercises in the past three-and-a-half years, of which two were dilutive in nature.
On the other hand, management is likely to have identified attractive investment targets, over and above its Gabon investments. It is building up a huge war chest, with this $740m and the recent $1.5b term loan (part of it likely to be refinancing). Olam’s share of equity in Gabon is about $290m, so at least $500m from this sum is likely to be earmarked for M&As, which will lead to positive newsflow.
Action & Recommendation:
Olam has traded at 24x PER on average since its initial public offering, but we now expect some de-rating as more of its earnings come from the upstream and midstream segments, and its track record in raising equity. We peg our target price at 20x FY Jun12F (previously 25x), reducing it to $3.38. However, we maintain our BUY call as we see a good entry opportunity and catalysts from positive newsflow.
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