Olam International Ltd (CIMB)

NEUTRAL Maintained
S$2.83 Target: S$3.08
Mkt.Cap: S$6,051m/US$4,918m
Logistics

Raising S$740m in fresh equity

Growth at the expense of dilution. Olam will be raising S$740m by issuing 286.1m new shares, implying 13.4% dilution for existing shareholders (assuming nonparticipation in the preferential issue). The funds will be sed mainly for future acquisitions, with the remainder for capital expenditure and general corporate purposes. We have cut our FY11-13 EPS estimates by 7-10% to account for a larger share base, partially offset by higher interest income. We have a lower target price of S$3.08 (from S$3.34) following our earnings adjustments, still based on 18.7x CY12 P/E. Maintain Neutral in view of the earnings dilution which may result in a negative knee-jerk reaction, though stable earnings growth and the announcement of earningsaccretive acquisitions further out may serve as re-ating catalysts.

The news:
Raising funds in three tranches. The offer to raise S$740m contains three tranches:
(i) Tranche 1: placement of 94.4m new shares at S$2.60 per share (8.4% discount to 3 Jun VWAP) to institutional and other investors;
(ii) Tranche 2: preferential offering of 97.3m new shares at S$2.56 per share (9.8% discount to 3 Jun VWAP) to entitled shareholders on the basis of one new share for every 22 existing shares;
(iii) Tranche 3: proposed subscription of 94.4m new shares at S$2.60 per share by Temasek (subject to EGM approval).

The second tranche has a guaranteed take-up of no less than 39.8% by major shareholders Kewalram, Temasek and CEO Mr Sunny Verghese, while the fundraising exercise has been fully underwritten by joint lead anagers JP Morgan, Credit Suisse, HSBC and Standard Chartered. Proceeds will be used for potential acquisitions (50% of net proceeds), capital expenditure (30%) and general corporate purposes (20%).

Comments:
Dilutive for shareholders. The issue of 286.1m new shares will enlarge Olam’s share base by 13.4%. Pricing represents 8.4-9.8% discounts to Olam’s VWAP on 3 Jun (last day before trading halt). However, Olam’s shares had been falling in the days leading to the trading halt amid fears of dilution. If we were to refer to its oneweek VWAP prior to the trading halt, the placement actually represents larger 11.8-13.1% discounts. We expect the significant dilution and discounts to result in a negative knee-jerk reaction on the resumption of trading.

Valuation and recommendation
Cutting FY11-13 EPS estimates by 7-10% to account for a larger share base, partially offset by higher interest income. Pending deployment, net proceeds of S$731.8m may be deposited with banks or in short-term money markets. Maintain Neutral for now; lower target price of S$3.08 (previously S$3.34), still based on 18.7x CY12 P/E. While the earnings dilution is not positive, we recognise that a stronger balance sheet after equity-raising should help the group execute its medium-term growth strategy. Beyond the immediate knee-jerk reaction, we see catalysts from the announcement of earnings-accretive acquisitions as well as continued earnings growth.